ESG trends to impact capital markets in 2017

By Vikas Vij —The beginning of 2017 marks an inflection point for institutions that want to invest for the long-term. Investors and policy makers have increasingly advocated against short-termism. Institutional investors can manage economy-wide risks more effectively through collaborative engagements that strengthen market standards in environmental, social and corporate governance (ESG) areas.

 

MSCI has published a new research paper, “2017 ESG Trends to Watch,” which explores how the major ESG trends will affect the capital markets for the next decade. According to the report, in 2017 some of the world’s largest investors may differentiate themselves by gearing toward the long view.

 

The researchers believe investors will turn their attention in the coming year to mitigating exposure to the physical risks from climate change, especially the encroaching scarcity of water. Corporate governance in Asian capital markets will be in focus in 2017, and codes that promote engagement between Asian companies and investors may be rapidly adopted.

 

In 2017, institutional investors may apply more differentiated and targeted strategies to integrate ESG signals across asset classes, markets and factor exposures. The researchers also see increased adoption of corporate disclosures targeting UN Sustainable Development Goals as a boost for institutions that aim to broaden their programs for impact investing.

 

In China and India, domestic and global standards will likely converge in 2017 as companies in these markets deepen their understanding of standards required to attract sustainable finance from international investors.

 

According to the MSCI researchers, 2017 may be the year that ESG grows up. A series of research papers published last year extolled the virtues embedded in ESG signals. Cambridge Associates found that ESG made a stronger contribution to performance of companies in emerging markets than those in developed markets. 

 

Research by Barclays has found that governance factors could be linked to credit performance. Strong management quality is likely to result in greater fiscal responsibility and fewer credit downgrades. Both studies show that ESG signals are nuanced, and selective application may be more effective than a blanket approach.