Once bitten, twice shy: how unexpected risks are concentrating investors’ minds

Data is the unglamorous foundation on which investment decisions are built. And the increasing availability of reliable ESG data is giving investors more powerful risk-assessment tools, MSCI’s Martina McPherson tells Mike Scott

One of the signs that ESG factors are here to stay as an issue for investors for the foreseeable future came a few years ago when the rather obscure world of benchmark providers and SRI research firms underwent a rash of consolidation.

One of the main buyers (along with ThomsonReuters and Bloomberg) during that period was the data provider MSCI, which bought RiskMetrics in 2010, a year after RiskMetrics itself had bought the boutique ESG research firms Innovest Strategic Advisers and KLD.

Data is the unglamorous foundation on which investment decisions are built. One of the factors that had stopped investors from incorporating ESG factors into their investment decisions in the past was the lack of information that was accurate, reliable and standardised across different companies, sectors and geographies.

There is still a long way to go in this regard, but a number of data providers are working to fill the gap.

“There is not enough consistency in the different data streams we work with,” says Martina McPherson, vice-president, marketing and commercial relationships, at MSCI. “The index world is about defining classification standards. There is a need for all the ESG research houses to define new standards in this area.”

MSCI’s purchases were driven by the fact that indices and benchmarking were a natural fit with ESG analytics, McPherson adds. “It was a very strong market opportunity and ESG complemented our existing product offering. The acquisition has really strengthened our business.”

Since the RiskMetrics deal, the firm has increased the profile of its ESG research and extended it across different asset classes – most notably corporate and sovereign bonds. “If investors had taken more note of some of the systemic risk factors in different countries, they would have been better prepared for the financial crisis,” McPherson points out.

Recent announcements by MSCI illustrate some of the ways that data providers are putting the greater availability of ESG information to good use. In June, it announced a new tool that allows investors to assess the ESG risks of the companies whose shares are in their portfolio. These risks include carbon emissions, water stress and human capital development.

Another product allows investors to look at individual companies’ significant social and environmental impacts and their ability to manage those impacts.

Institutional investors are able to determine company involvement in major ESG controversies, how well companies adhere to international norms and principles, and to assess company strategies, disclosure and performance with respect to these norms and principles.

MSCI says the tools helps investors to satisfy reporting needs, including those of the UN Principles for Responsible Investment (PRI); conduct internal ESG risk assessment; and identify companies that it should engage with on certain issues.

As a result of the financial crisis, investors have become much more concerned about risk management, MSCI believes. “People looked at the crisis and saw that unexpected risks can have profound consequences,” says McPherson. “Analysing extra-financial factors is part of risk management and looking at new investment opportunities.”

And she believes that the sector may see further deals. “There are still a number of small specialist firms that focus on one particular sector, asset class or geographical region. I’m sure there will be more acquisitions.”