Inside investment Time shortening between ESG issues emerging and market reaction - MSCI

A report from MSCI ESG Research, a provider of research and analysis of the environmental, social and governance-related (ESG) business practices of companies globally, has suggested that that if 2014 was any guide to go by “there is a shortening lag between when ESG issues emerge and when markets and regulators react.”

The new 16-page ‘2015 ESG Trends to Watch’ report written by Linda Eling Lee, MSCI’s Global Head of ESG Research, was published just a matter of weeks before a fossil-fuel divestment campaign was stepped up this February in a global day of action by Fossil Free campaigners targeting UK banks to sell off their toxic assets. Their campaign was mirrored by similar actions in Australia, South Africa and other countries.

Highlighting matters the UK’s big five banking groups put some £66 billion (bn) into fossil fuel extraction in 2012 alone, while UK universities are estimated to have invested an estimated £5.2bn invested in fossil fuels.

To date the Go Fossil Free campaign has persuaded 180 institutions including local authorities, universities and churches to divest their investments in coal, oil and gas, which are worth $50bn (c.£33bn).

Eling Lee commenting in MSCI ESG’s latest annual edition stated: “Whether it is shifting regulations targeting the tax gap, a new market benchmark to define green bonds, or the adoption of low carbon investment solutions, our 2014 ESG Trends to Watch report highlighted areas where institutional investors showed growing appetite to address longer term risks and opportunities.”

Against the cacophony of renewed geopolitical fault lines, juxtaposed against a return to growth in the US, emergence of the next generation of tech darlings and the upcoming [UN] climate talks in Paris, MSCI ESG examined which ESG trends will be “most top-of-mind” among investors in 2015.

In terms of aligning to fuels of the future and whether institutional investors are positioned for the transition to renewable energy, the report posited: “In 2015, we foresee that widespread adoption of de-carbonization tools will be followed by interest in aligning portfolio exposure to our future energy technology.”

Institutional investors globally have come on a “tremendous learning curve” over the past year in understanding their exposure to carbon stranded assets said. MSCI ESG.

Indeed, the report noted: “Whether catalyzed by a concern over mispriced fossil fuel assets or pressure from a persistent call for divestment, investors have begun to scrutinize the carbon-related risks embedded in their portfolios.”

The options have certainly multiplied for investors. From a simple snapshot measurement of companies’ current carbon emissions, investors can now adopt “a total portfolio accounting of current and future emissions, measured against clear market benchmarks.”

According to MSCI ESG Research’s data on the planned future capacity of all companies in the MSCI ACWI Index, which consists of 46 country indexes, nearly 10% of power generation companies will increase renewables capacity by at least 10% over the next five years.

In terms of seeking scalabale social impact, the report asked whether investors can find large scale exposure to positive social impact through listed equities.

Certainly investors large and small are looking around for ways to “steer capital” toward positive social impact, but MSCI ESG pointed out: “Despite the tremendous need globally - 870m people suffer from chronic diseases and 4bn people lack digital access - very little of this willing capital is finding its way to address these needs.”