It’s the sort of thing normal people with real lives might miss: global financial analyst MSCI has brought out a whole new range of ratings to help investors analyse how funds are managing environmental, social and governance (ESG) issues. Or, in Muggle: badges to help people figure out how Good or Bad funds are for people and the planet.
This really is big news. It’s big news because MSCI (or Morgan Stanley Capital International, if that rings any bells) is probably the biggest dog in the world when it comes to getting under the bonnet of companies and funds.
The indices, or benchmarks, that MSCI puts together are what the people that manage our pensions and ISAs – i.e. those who decide the level of comfort by which we live our lives – abide by.
The MSCI World Index, for example, is a collection of over 1,600 companies from 23 countries across 5 global regions. Chugging along since 1968, the MSCI World is the bible for anyone investing in global companies; you literally can’t run money without paying it some mind.
So, the fact that MSCI has found a system to assess how Good or bad a fund is means that the industry is going to take it up – and probably with gusto.
The Good, the Bad and the Ugly
The new ratings system will separate funds out into three broad categories: ‘leaders’, ‘average’ and ‘laggard’ with a broader spectrum of AAA to CCC running throughout. As those of you familiar with Margot Robbie’s excellent breakdown of credit default swaps in The Big Short will know, the latter mirrors global credit ratings.
As credit ratings are the be-all-and-end-all for companies and countries – the means by which they thrive or die – it’s a rather shrewd move by MSCI to equate how a fund’s investments are treating people and the planet with this terminology: thumbs up guys and gals.
So far, MSCI has applied its new system to over 32,000 funds and ETFs. As well as assessing what the firms inside these funds are doing now, the ratings also take into account trends – tracing a fund’s ‘ESG momentum’ to get an insight into its track record.
This, says MSCI, is designed to pinpoint funds investing in companies that are largely getting better or largely getting worse every year. Finally, MSCI will review the ESG ‘tail risk’ – i.e. the number of bad companies a fund is investing in and make sure to highlight this to investors.
The launch comes at a time when the money management world – especially those in the Good part of it – are tackling a veritable explosion in ‘ESG’ rated funds that have been launched in response to mounting evidence that investors (now they know) no longer want to pour all their money into arms, tobacco and fossil fuels.
However, as we are keen to call out here at Good With Money, a whole BUNCH of these funds really are wolves in sheeps clothing. Many simply strip out one or two tobacco companies – maybe Rolls Royce for arms – and then slap an ‘ethical’ or ‘socially responsible’ label on before marketing them to millennials using an avocado-green colour-scheme.
As we all become more aware of the devastation humanity is wreaking on the natural world – as well each other (though nothing new there, arguably), however, our level of financial literacy is not keeping pace and so many of these managers are getting away with murder.
Remy Briand, head of ESG at MSCI points to this himself, underlining this ‘proliferation’ of ESG funds as one of the key reasons for the launch of the new ratings: “The MSCI ESG Fund Ratings is designed to provide investors with greater transparency to better understand the environmental, social and governance characteristics of funds.
“As the number of ESG funds proliferate, and ESG-orientated investment options and strategies are being adopted by wealth and fund managers, we strive to provide the tools and solutions to help these investors better understand ESG risks.”
Finding a standard
The new ratings join an initiative launched by Morningstar in 2015: ‘The Morningstar Sustainability Ratings’. While starting with promise, however, the Morningstar offering has been criticised for discriminating against small and mid-sized companies.
This is largely because it is difficult, if not impossible in some cases, to get your hands on lots of data for smaller firms, while the giants have to disclose every minute detail, especially around governance (well, almost). It has meant, though, that really Good funds have been getting just one or two star ratings.
Morningstar moved to address this, claiming last year it would tweak the process to take this issue into account. However, as big as Morningstar is – it ain’t no MSCI. So they entry of the truly BIG dog into this field is a very welcome development. Watch this space for better investing!
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