MSCI has launched a suite of ESG indices focussed on factors as investor demand for sustainable investment products increases.
The index provider launched its first factor product, the Minimum Volatility index, in 2008 and now has $214bn benchmarked to the range of products, which span Low Size to High Yield to Momentum.
MSCI says its leading factor indices have been used in the new ESG range: Minimum Volatility, Quality, Value and Multi-Factor indexes. It worked with a Taiwanese state pension fund to develop the indices.
It follows two smart-beta products released by FTSE Russell last December in conjunction with Research Affiliates. The FTSE4GOOD RAFI and the FTSE RAFI ex Fossil Fuels use existing indices weighted using a composite of fundamental factors with an ESG overlay.
NN Investment Partners portfolio manager for multi-asset factor investing Stan Verhoeven says it “makes sense” for factor investing products to incorporate ESG given demand from institutional clients.
Regarding ESG as a factor in its own right, Verhoeven says NN IP’s three criteria for factors include a proven long-term track record, economic rationale and academic evidence, plus positive expected returns after costs.
But new factors like ESG lack historical data to meet those criteria, although there has been early research into it as a factor.
“That does not mean such parameters cannot be taken into account to enhance returns but it is a good reason to be reluctant,” Verhoeven says. “Within factor investing it is better to be safe than sorry as data mining is a potential issue.”
The MSCI ESG factor products are: MSCI Minimum Volatility ESG Target indexes; MSCI Quality ESG Target indexes; MSCI Value ESG Target indexes; and MSCI Multiple-Factor ESG Target indexes.
UK demand for sustainable investing increases
The launch comes as Schroders Global Investor Survey shows demand for sustainable investment has increased over the last five years.
Fifty four per cent of UK investors have increased their allocation to sustainable investment funds compared to five years ago, although this is slightly behind 58 per cent of investors in Europe and 64 per cent globally.
Sixty seven per cent of UK investors said that sustainable investing was more important to them now than it was five years ago, compared to three quarters of investors in Europe and 78 per cent globally.
Schroders global head of stewardship Jessica Ground says while profitability remains the central investment consideration, interest in sustainability is on the rise and many investors see sustainability and profits as intertwined.
However, Ground says investors don’t necessarily grasp that investing sustainably can be a more effective way to make an impact rather than their other individual behaviours such as recycling or where they buy their food from.