Foundations of ESG Investing – Part 3: Integrating ESG into Passive Institutional Portfolios
categories: Indexes, ESG Products & Services, Americas, EMEAI, Asia Pacific, Equities, Fixed Income, MELAS Dimitris, NAGY Zoltan, NISHIKAWA Laura, LEE Linda-Eling, GIESE Guido
According to recent surveys, asset owners’ have shifted their main focus to ESG’s financial benefits, as opposed to social benefits. In the third part of this paper, we discuss how ESG can be integrated into passive allocations using MSCI ESG Ratings, which provided better risk-adjusted returns from August 2010 to December 2017 than the MSCI ACWI Index. We used existing best-in-class selection-based index methodologies (the MSCI ESG Leaders Index) for the creation of hypothetical global and regional passive allocations replicating these indexes. We observed significant regional variations in ESG profiles and performance during our study period, but all showed a clear reduction in key risk measures.