ESG 2: Demographics is having an impact on ESG demand

In the second of a two-part article, Remy Briand (pictured), head of ESG at MSCI, speaks to SRP about the use of ESG strategies either to outperform the market or as a risk management tool, as well as why the overlap between ESG and smart beta or systematic investing will help to increase adoption.

The first consideration is always long-term risk, such as climate change, according to Briand. "Companies with a high carbon footprint will have to adapt to the new non-fossil based world or otherwise will lose," said Briand. "ESG is helping to assess the activities of companies in this area and this is helping investors to learn and be more granular with their investments."

ESG is an approach that can be applied to different asset classes rather than an asset class in its own right - it is more of a principle that can be applied to different types of investment strategies, according to Briand. "With regards to indices, most of the traction comes from the adoption of broad-based ESG indices (such as MSCI World) and the concept is being applied as an overall layer, but climate-linked strategies (low carbon) are getting more attention than other themes," said Briand. Gender diversity has also gained momentum in the last couple of years. "It is obvious that low carbon is an important element to consider for long-term investors, such as pension funds, but demographics are also having an impact on demand as the millennials view of the world is also channelling some of the demand for this kind of strategy," said Briand.

Historical data shows and demonstrates that companies with more women on the board or in management positions have performed better, according to Briand. "Data is helping to make a case for these themes or aspects of ESG, as opposed to basing a decision on some sort of abstract consideration. Once you can demonstrate a link with performance, investors will consider how to use and align their investment with those ESG views."

Data has had a positive impact in this area and the granularity of the data is bringing transparency, according to Briand. "Clearly, we are now in the position to analyse data in a way we were not able years ago," he said. "This is helping to unleash new opportunities for index and product providers, but also end investors. We are a data provider and we sell our ESG rating to asset managers, but also use it to inform the development of new indices. MSCI World ESG leaders is essentially powered by MSCI ESG ratings. ESG can be applied to most investments. Started with equities, it is now being applied to corporate credit analysis and sovereign funds."

The overlap between ESG and systematic investing (smart beta) is also helping to promote the adoption. "First, the focus was on filtering or screening out non-ESG assets, but nowadays this is much more comprehensive, and we have the ability to design indices with specific profiles that can lend themselves better or be customised for a particular wrapper," said Briand. "We can now develop risk control ESG indices that would work better on structured notes, but also momentum or dividend ESG indices that would lend themselves better to ETFs, for instance."

Over 15,000 structured products feature MSCI underlyings, according to SRP data. The US market has the higher number of underlyings from the index provider linked to structured products, at over 7,000 structures, followed by Germany and Austria (over 2,000), and Sweden (over 1,500). Goldman Sachs is the leading distributor of these products (3,313), followed by JP Morgan (1,642), UBS (1,042 products) and Morgan Stanley (643 products). There are 3,563 live products linked to MSCI underlyings, led by the iShares MSCI Emerging Markets ETF (894 products) and the iShares MSCI EAFE ETF (782) and followed by the MSCI EAFE (627) and MSCI Emerging Markets (556) benchmarks.

The best-selling of the provider's index this year is the iShares MSCI Emerging Markets ETF, which has appeared in over 100 products worth an estimated $379m, followed by the MSCI EAFE, which has appeared in 51 products worth an estimated $245m.

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