Global index provider MSCI has launched a new index and metrics framework giving investors the chance to align exposure of future investment products such as ETFs with public companies whose products and services help to address major environmental, social and governance (ESG) challenges.
The MSCI ACWI Sustainable Impact Index is launched at the same time as MSCI ESG Sustainable Impact Metrics (provided by MSCI ESG Research), which aims to measure revenue exposure to sustainable impact solutions and support actionable thematic allocations in line with the UN Sustainable Development Goals
The MSCI ESG Sustainable Impact Metrics are based on the 17 Sustainable Development Goals announced by the UN, which list among them the targets of eliminating world hunger, promoting clean energy and reducing inequalities.
An impact investing approach aims to generate a positive impact on society or the environment by directing capital toward companies that are providing solutions to social or environmental challenges. Unlike ESG integration, which uses extra-financial information with the ultimate aim of achieving long-term financial objectives by reducing exposure to companies with high ESG-related risk, impact investing explicitly targets extra-financial goals alongside financial return.
Historically, investors have used a variety of investment approaches to address ESG issues. By applying negative exclusions, socially responsible investments, values-based investing and various divestment campaigns have targeted companies contributing to environmental and social problems.
The MSCI ESG Sustainable Impact Metrics provides a useful foundation from which to apply the principles of impact investing to public equities. Its aim is to measure revenue exposure to sustainable impact solutions and support actionable thematic allocations in line with the UN Sustainable Development Goals.
MSCI has grouped the 17 Sustainable Development Goals into five actionable impact themes: Basic Needs (representing the goals of no poverty, zero hunger, good health & wellbeing, clean water & sanitation, and sustainable cities & communities); Empowerment (representing the goals of quality education, gender equality, decent work & economic growth, reduced inequalities, industry and innovation & infrastructure); Climate Change (representing the goals of climate action, and affordable & clean energy); Natural Capital (representing the goals of responsible consumption & production, life on land, and life below water; and Governance (representing the goals of peace, justice & strong institutions, and partnerships).
Linda-Eling Lee, Managing Director and Global Head of ESG Research, said in a statement: “This framework was developed following a client consultation with more than 25 of the world’s leading asset owners and managers, who agreed that there is room for new impact-oriented thematic investment approaches in public equity markets.
“To date, impact investing has largely been limited to small-scale, private equity strategies but there has not been a tool aiming to measure the extent to which exchange-listed companies are involved in solutions for a more sustainable society and environment. The Sustainable Development Goals gave us the opportunity to offer tools to provide insight into what we define as Sustainable Impact.”
Launched in conjunction with the new metrics, the MSCI ACWI Sustainable Impact Index is the company’s first index to harness the new framework. The eligible securities for the MSCI ACWI Sustainable Impact Index are derived from MSCI ACWI Index, its parent index. To be eligible for inclusion in the index, companies must generate at least 50% of their sales from one or more of eleven sustainable impact categories which comprise: nutritious products, drugs for major diseases, sanitary products, education, affordable housing, loans to small and medium size enterprises, alternative energy, energy efficiency, green building, sustainable water, and pollution prevention. Furthermore, companies must maintain minimum ESG standards to be eligible for inclusion.
Securities are weighted based on sustainable impact dollar sales as well as the ratio of free-float adjusted market capitalization of security to total market capitalization of issuer. Sustainable impact dollar sales are computed using the product of the trailing 12-month sales and the cumulative percentage of sales from the sustainable impact categories. Additionally, sector weights are capped at 20% and issuer weights are capped at 4%. The index is rebalanced quarterly coinciding with the review of the parent ACWI Index.
Using the MSCI ESG Research Sustainable Impact Metrics database, MSCI identified 987 companies in the MSCI ACWI Index (approximately 40% of the total number of constituents) that derived revenues from sustainable impact themes. Among these, 339 companies derived at least 20% of their revenue and 123 companies derived the majority of their revenue from sustainable impact themes.
As of 31 March 2016, the MSCI ACWI Sustainable Impact Index has 88 constituents and contains significant exposure to the United States (40.6%), France (12.2%), Japan (7.6%), Denmark (6.4%) and the United Kingdom (5.8%). The major sub-industry exposures are to biotechnology (14.3%), electrical components and equipment (10.0%), household products (9.2%), packaged foods and meat (8.2%) and auto parts and equipment (8.0%). The top five companies are Valeo – Pollution Prevention (4.5%), Schneider Electric – Energy Efficiency (4.1%), Pearson – Education (4.1%), ABB – Energy Efficiency (4.1%), and Vestas – Alternative Energy (3.9%).
The MSCI ACWI Sustainable Impact Index outperformed the underlying ACWI benchmark by 1.7% on an annualized basis between November 2010 and November 2015. An investment of $1m into a sample portfolio replicating the index would have been associated with over $180,000 in annual revenues from social impact solutions, as well as over $350,000 in annual revenues from environmental impact solutions.