Incorporating sustainable impact in your investment process
Laura Nishikawa, Head of Fixed Income at MSCI ESG Research, highlights a new tool for aligning investments with the SDGs.
Institutional investors increasingly are looking for ways to steer capital toward companies that help to address major social and environmental challenges.
Now MSCI ESG Research is introducing an index and measures designed to target companies whose businesses address one or more of the challenges defined by the Sustainable Development Goals (SDGs) adopted last September by the United Nations.
The framework marks what we believe to be a first for supporting the alignment of investments with the SDGs and impact-oriented investing, which aims to produce measureable social or environmental benefits along with financial return. The structure reflects consultation with 25 leading asset owners and managers on possible approaches that build on the SDGs at scale.
To estimate the share of revenue that companies receive from products and services that produce social or environmental benefits, MSCI ESG Research has collected or estimated the percentage of revenue derived from such products and services for more than 8,500 companies across environmental themes and more than 2,500 companies across social themes, as of March 1, 2016.
A framework for sustainable impact
The SDGs, which took effect in January, aim to end poverty, protect the planet and ensure prosperity worldwide via a series of targets to be achieved by 2030. To build a framework for institutional investors to align with these goals, MSCI ESG Research grouped the 17 SDGs into five actionable themes: basic needs, empowerment, climate change, natural capital and governance.
Within each theme, we identified specific categories of products and services that we determined address environmental and social challenges. The taxonomy draws from expertise within MSCI as well as on feedback from clients and discussions with experts who serve on the MSCI ESG Research Thought Leaders Council.
MSCI ESG research taxonomy of products and services that further the SDGs
As the chart below shows, the MSCI ESG Sustainable Impact Metrics database includes 987 companies in the MSCI ACWI Index (about 40% of the index by number of companies as of March 1) that have estimated revenue tied to products and services that potentially advance the five themes outlined above. Of those companies, 123 derived at least half their revenue from exposure to sustainable impact themes, while 339 companies derived at least 20% of their revenue from such themes.
Revenue that ties to sustainability (MSCI ACWI Index, March 2016)
Institutional investors may choose to apply their own thresholds. For example, companies that derived at least half their revenue from sustainable impact themes as of March 1 included Tesla, Vestas and Novo Nordisk. Companies that derived at least 20% of their revenue from sustainability included firms such as Novartis, Campbell Soup Company and EDP.
We also propose options for excluding companies that happen to offer harmful products or that fail to adopt sound governing practices.
Developing a mechanism for reporting will demand several steps that we anticipate addressing over time. Initial steps include assessing qualitatively the impact that companies produce and measuring consistently across sectors investors’ exposure to companies whose products and services address environmental and social challenges.