• Vector Insights

    Pro “active” stock selection: The key to “passive” ESG investment

    Russell Grigg, General Counsel and Head of Compliance
    31 May 2018
     

    Thorough analysis of Environmental, Social and Governance (ESG) characteristics can give investors important insights into the quality of a company's management, its risk profile and social practices, as well as its financial status. Understanding a company's commitment to ESG is important because it allows investors to better assess the company's long-term investment performance potential and the risks to which it is exposed.

    To get these insights, careful analysis is required of a company's policies, procedures and practices. Considerations as varied as labour standards, workplace diversity, efficient use of resources, risk controls, management competency and environmental impacts need to be a part of a robust ESG risk framework.

    This detailed analysis is necessary to identify:

    • companies that are ESG leaders, that should be considered for investment; and
    • companies that are laggards, that should be avoided.

    Such analysis has traditionally been the domain of active management. Surprisingly, index provider MSCI is the leading global ESG researcher and its expertise is utilised in its ESG indices which passive funds track. MSCI has a team of over 170 analysts worldwide assessing all of the stocks in its global universe on a 'AAA' to 'CCC' scale according to their exposure to industry specific ESG risks and their ability to manage those risks relative to their peers.

    Forward looking ESG ratings like this help investors to avoid the risk of an ESG failure overwhelming a company's financial performance or reputation, as was recently the case with Facebook.

    Stock selection is key

    Well before Facebook's troubles with Cambridge Analytica had emerged, MSCI had proactively identified the risk that data breaches and regulatory action were potential problems for the social networking company. MSCI had awarded Facebook a relatively low ESG rating of just BBB,compared to Microsoft's AAA rating.

    "Facebook is exceptionally vulnerable to regulatory actions and user dissatisfaction in case of privacy and data breach. Facebook's controversial data collection and advertising practices have continued to trigger user complaints and regulatory actions," MSCI warned in an ESG ratings report last year.

    Revelations of Facebook's data privacy breaches this year turned out to be so significant that Facebook CEO Mark Zuckerberg was brought before the US Senate and European Parliament to explain his company's suspect practices.

    Pro-active ESG analysis can help investors avoid controversies like this and other major corporate scandals, including the Volkswagen emissions scandal. Avoiding Facebook and Volkswagen in portfolios not only had a positive social impact, it protected people's investments when the share prices of both companies crashed after poor ESG practices were revealed.

    The detailed analysis required to get ahead of such scandals takes a lot of work. This is where MSCI is in a unique position to help investors – with its team of 170 analysts.

    Fund managers can't do it alone

    Many active fund managers maintain that they incorporate ESG factors into their investment analysis. However, investors need to ask whether their ESG analysis is in-depth or superficial. If they don't have a big team crunching the numbers and examining all aspects of a company's operations, their ESG analysis is likely to produce little insight.

    In contrast, MSCI's large team delivers the analysis necessary to construct a portfolio with companies that demonstrate both a higher MSCI ESG Rating and a positive ESG trend, while maintaining a broad and diversified investment universe.

    This is why MSCI is regarded as the leading ESG research provider in the world.

    VanEck has partnered with MSCI to create a state-of-the-art index that utilises MSCI's ESG capability. The resulting index incorporates both values-based and impact investing, backed by deep ESG research.

    The Index: MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index (ESGI Index)

    VanEck Vectors MSCI International Sustainable Equity ETF (ASX: ESGI) tracks the ESGI Index. Investors who are committed to sustainable investing and who are seeking a values-based and social impact investment fund to align their investments to their ethics and values are using ESGI to access a portfolio of ~170 international ESG leaders in a single trade on ASX.

    MSCI does the hard work to identify only those companies that are the ESG leaders in their sector and investors can be confident that they won't be exposed to companies like Facebook that some other so-called 'ethical' and 'sustainable' funds had so erroneously included in their portfolios.

    For more information on ESGI and a copy of the PDS, speak to your adviser or click here

     

    IMPORTANT NOTICE: This information is prepared in good faith by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 ('VanEck') as the responsible entity and issuer of VanEck Vectors MSCI International Sustainable Equity ETF ARSN 623 953 177 ('ESGI'). This information is general in nature and not financial advice. It does not take into account any person's individual objectives, financial situation or needs. Before making an investment decision investors should read the product disclosure statement and with the assistance of a financial adviser consider if it is appropriate for their circumstances. A copy of the PDS is available at www.vaneck.com.au. The fund is subject to investment risk, including possible loss of capital invested. Investing in international markets has specific risks that are in addition to the typical risks associated with investing in the Australian market. These include currency/foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and tax regulations. No member of the VanEck group guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from the Fund. ESGI is indexed to a MSCI Index. ESGI is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to ESGI or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and ESGI. © 2018 VanEck®