A new commentary from MSCI highlights five ESG trends that represent potentially overlooked costs and opportunities for investors.
According to Linda-Eling Lee and Matt Moscardi, respectively the global head and executive director of ESG Research at MSCI, China’s decision to stop accepting 24 kinds of solid waste has massive implications for the global plastic waste trade. “[E]xporting countries have scrambled to find new markets for their waste and some are getting serious about waste reduction regulations,” the pair said.
China’s hard line, they argue, has elevated waste reduction from a marketing priority to a business challenge for 2019. An analysis of regulatory filings of the 2,450 constituents of the MSCI USA IMI revealed that as many as 12 industries, including agricultural products and office services and supplies, could be affected by the global war on waste.
They also warned that when it comes to ESG-related regulations, the script could flip from rules targeting issuers to an increased focus on rules for investors, including both asset owners and asset managers. As regulators increasingly scrutinize the business of ESG investing, MSCI estimated as much as US$32.6 trillion in assets under management being subject to pending regulations or regulations in discussion as of 2018.
“Investors may find these useful, as they ostensibly reduce the amount of second guessing about ESG’s treatment in their investment processes,” Lee and Moscardi said. “But reactions to efforts aimed at classifying ESG investment products could be more equivocal and contentious, particularly for asset managers.”
Citing a finding by the Intergovernmental Panel on Climate Change, they also noted that investment allocations made in 2019 will need to account for an accelerated carbon transition or accelerated climate risk at times before they finish paying out. To illustrate, they pointed to an analysis of MSCI Real Estate data on 456 commercial real estate assets — a total of US$22 billion in market value — in 200 Florida ZIP codes.
“[W]e found that 51% of the assets are in the vanguard of rising seas,” they said, adding that the 20% of those assets constructed in flood-prone ZIP codes after 2000 could be affected by sea-level rise before they reach the end of their usable life. Recognizing the implications of climate change, other investors have started accruing land with water rights or taking advantage of farmland experiencing a longer growing season.
And while the explosion in big data has made investors less reliant on voluntary corporate disclosure for ESG information, Lee and Moscardi argue that having a myriad of alternative data sources is not enough. “The hard – and important– part will be knowing how to identify and apply the most relevant metrics to provide increasingly relevant ratings and research,” they said.
Finally, the two authors forecast that corporate investors will become more anticipatory when it comes to governance issues. Rather than reacting and asking questions after a scandal erupts, investors will start asking what their rights are before that happens. “This is important as some companies seem to be immune to change even after a scandal,” the pair said.
According to an MSCI analysis of leadership-controversy data from 2015 covering 2,675 companies, companies in the lower third of “investor influence” refreshed their boards and CEOs in the following three years far less often than more easily influenced companies.
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