An Introduction to MSCI ESG Indexes
There are various portfolio objectives within the realm of sustainable investing.
For example, some investors may want to build a portfolio that reflects their personal values. Others may see environmental, social, and governance (ESG) criteria as a tool for improving long-term returns, or as a way to create positive impact. A combination of all three of these motivations is also possible.
To support investors as they embark on their sustainable journey, our sponsor, MSCI, offers over 1,500 purpose-built ESG indexes. In this infographic, we’ll take a holistic view at what these indexes are designed to achieve.
An Extensive Suite of ESG & Climate Indexes
Below, we’ll summarize the four overarching objectives that MSCI’s ESG & climate indexes are designed to support.
Objective 1: Integrate a broad set of ESG issues
Investors with this objective believe that incorporating ESG criteria can improve their long-term risk-adjusted returns.
The MSCI ESG Leaders indexes are designed to support these investors by targeting companies that have the highest ESG-rated performance from each sector of the parent index.
For those who do not wish to deviate from the parent index, the MSCI ESG Universal indexes may be better suited. This family of indexes will adjust weights according to ESG performance to maintain the broadest possible universe.
Objective 2: Generate social or environmental benefits
A common challenge that impact investors face is measuring their non-financial results.
Consider an asset owner who wishes to support gender diversity through their portfolios. In order to gauge their success, they would need to regularly filter the entire investment universe for updates regarding corporate diversity and related initiatives.
In this scenario, linking their portfolios to an MSCI Women’s Leadership Index would negate much of this groundwork. Relative to a parent index, these indexes aim to include companies which lead their respective countries in terms of female representation.
Objective 3: Exclude controversial activities
Many institutional investors have mandates that require them to avoid certain sectors or industries. For example, approximately $14.6 trillion in institutional capital is in the process of divesting from fossil fuels.
To support these efforts, MSCI offers indexes that either:
- Exclude individual sectors such as fossil fuels, tobacco, or weapons;
- Exclude companies from a combination of these sectors; or
- Exclude companies that are not compatible with certain religious values.
Objective 4: Identify climate risks and opportunities
Climate change poses a number of wide-reaching risks and opportunities for investors, making it difficult to tailor a portfolio accordingly.
With MSCI’s climate indexes, asset owners gain the tools they need to build a more resilient portfolio. The MSCI Climate Change indexes, for example, reduce exposure to stranded assets, increase exposure to solution providers, and target a minimum 30% reduction in emissions.
An Index for Every Objective
Regardless of your motivation for pursuing sustainable investment, the need for an appropriate benchmark is something that everyone shares.
With an extensive suite of ESG indexes designed specifically for sustainability and climate change, MSCI aims to support asset owners as they build a more unique and personalized portfolio.
Ocean Economy: The Next Wave of Sustainable Innovation
This graphic explores how the $1.5 trillion ocean economy can help fight against some of the toughest challenges facing the world today.
Ocean Economy: The Next Wave of Sustainable Innovation
Roughly 21–37% of total greenhouse gas (GHG) emissions are attributable to our current food system, which includes conventional agriculture and land use according to the latest IPCC report.
With the global population rising and more mouths to feed, now is the time to reconsider how we can tap into our global resources to build a more sustainable food system.
This infographic from Billy Goat Brands (CSE: GOAT) (“GOAT”) explores how the ocean economy—also referred to as the blue economy—plays a vital role in our fight against climate change and other environmental challenges facing the world today.
What is the Ocean Economy?
The ocean economy is described as the sustainable use of the ocean and its resources for economic development and ocean ecosystem health.
The global economic output of the ocean economy is $1.5 trillion each year. Here is an example of some of the activities and sectors that make up the ocean economy today:
|Harvesting of living marine resources||Fisheries
|Harvesting of non-living marine resources ||Marine biology
Oil & Gas
|Transport and trade||Tourism
Shipping and shipbuilding
|Renewable energy||Renewables (wind, wave, tidal energy)|
|Indirect economic activities||Carbon sequestration
Financing ocean-related economic activities will ensure the future sustainability of this vital resource, and help combat threats that pose a risk to humanity, such as overfishing, pollution, and habitat destruction.
However, some experts say that there is insufficient private and public investment in sustainable ocean economy activities.
The Investment Opportunity
Investors have a unique opportunity to drive change through companies innovating in the ocean economy and be part of the solution.
- The ocean could provide six times more food than it does today.
- Seafood continues to be the fastest growing sector by 2030 with only 60% of fish available for consumption.
- The ocean economy provides a smaller carbon footprint compared to conventional agriculture.
The potential for economic growth will only continue to grow, presenting investors and institutions with a chance to add value at this crucial stage of development while making a real and tangible impact.
In fact, investing $1 in key ocean activities can yield at least $5 in global benefits—a number that will continue to rise over the next 30 years according to a World Resources Institute report.
The report also states that investing between $2 trillion and $3.7 trillion globally across four crucial areas could generate between $8.2 trillion and $22.8 trillion in returns by 2050. These four areas are:
- Restoring mangrove habitats
- Scaling up offshore wind production
- Decarbonizing international shipping
- Increasing the production of sustainably sourced ocean-based proteins
An Ocean of Possibilities on the Horizon
Plant-based alternatives will play an important role in alleviating the pressure on ocean resources, and technological innovation has been pivotal in creating imitation products for the consumer market.
GOAT provides diversified exposure to expansion-stage companies that contribute to the ocean economy through innovative food technologies, functional foods and plant-based alternatives.
“We believe that plant-based seafood alternatives should be available for everyone, everywhere. That’s why we spent years creating a seamless experience that’s nearly indistinguishable from their animal-based counterparts.”
—Mike Woodruff, CEO Sophie’s Kitchen
Sophie’s Kitchen is one of GOAT’s investee companies and a leading California-based manufacturer and distributor of disruptive plant-based seafood alternatives.
Go to billygoatbrands.com to learn more about investing in the ocean economy today.
Impact Investing: Building a Better World
While investors often focus solely on returns, impact investing introduces a way to also tackle global environmental and social problems.
Typically, an investor’s main objective revolves around building wealth and then turning that wealth into an income generator. As a result, financial returns are accepted as the default performance metric.
But what if investing could also address the world’s most pressing social and environmental problems?
More Than Investing
This infographic from BlackRock introduces the concept of impact investing and explains why it can be a force for good.
What Does Positive Impact Look Like?
Impact investing is a sustainable investing approach that combines the intention to generate positive returns with positive, measurable social and environmental outcomes.
To understand what these outcomes actually look like, here are some highlights from the companies that the BlackRock Impact Team invests in.
- 102,000 GWh of renewable energy generated
- 11 million metric tons of food waste mitigated
- 114 million individuals empowered with access to financial services
- 99 million people given access to clean drinking water
- 600,000 families given access to affordable housing
- 1.8 billion patients given access to affordable healthcare
These outcomes were generated in 2020, and help to make our world a better place.
The Three Pillars of Additionality
For impact investing to be an effective strategy, investors must be able to accurately measure the positive outcomes their capital is helping to create. A company may claim to be aligned with the UN Sustainable Development Goals (SDGs), but its actions may not be making a real world difference.
“Alignment to the SDGs is not enough to qualify as impact; we require that companies advance the SDGs by providing a solution that is additional, thereby creating genuine impact.”
-Quyen Tran, Director of Impact Investing at BlackRock
Below is an overview of the three pillars of additionality that BlackRock uses to measure impact. In this context, additionality means an outcome would not have occurred without the company’s contribution.
1. Additionality From the Investee (the company)
A company provides additionality if its products and services address a need that is unlikely to be fulfilled by others. The primary sources of company additionality are:
- The application of leading technologies
- The deployment of innovative business models
- The delivery of products and services to underserved populations
Helping underserved populations is a powerful way to create impact. In 2017, for example, it was estimated that 1.7 billion adults did not have a bank account.
2. Additionality From the Investor
Investors can also provide additionality by empowering businesses to create positive impact. This can be done through five mechanisms:
- Invest with a long-term ownership mindset
- Engage with companies to help enhance their impact outcomes
- Invest capital when an impact company needs to raise more capital
- Bring much-needed visibility to undervalued impact companies
- Create a better marketplace for impact companies looking to go public
The effects of these mechanisms are already being seen worldwide, especially as awareness of environmental, social, and governance (ESG) factors rises. According to a 2020 report by KPMG, 80% of companies now publish sustainability reports.
3. Additionality From the Asset Class
Even with the help of private investments, the world faces a multi-trillion-dollar shortfall in its quest to meet the UN SDGs by 2030. Public equities have the ability to shrink this gap by moving capital towards enterprises that are solving the world’s greatest challenges.
|Private market impact investing||$0.5T|
Source: McKinsey & Co (2019), BlackRock (2020)
At $93 trillion in total value, public equities are roughly 20 times larger than private markets.
Building a Better World
Solving today’s greatest challenges often requires innovative solutions. Consider the fact that many regions suffer from a lack of doctors.
|Region||Density of Physicians|
|Europe||1 for every 293 people|
|Americas||1 for every 417 people|
|Southeast Asia||1 for every 1,239 people|
|Africa||1 for every 3,324 people|
Source: World Health Organization (2021)
An impact investing strategy will seek out companies whose products or services can help to alleviate this shortage. For example, the BlackRock Impact Team has identified a medical software company whose platform lowers administrative costs and increases productivity.
Cybersecurity is another area where investors can help create positive change—according to McAfee, cybercrime has become a $1 trillion drag on the global economy.
This risk disproportionately affects small and mid-sized enterprises (SMEs) because they have limited resources to protect themselves. Cybersecurity companies that specialize in servicing SMEs can help protect this important part of the economy.
The Time is Now
Impact investing is not limited to a single theme. Around the world, various social and environmental issues are capturing the attention of governments and society. Ultimately, what’s needed are innovative solutions.
“If your savings can earn a strong return invested in companies that are doing good for the world, why would you invest any other way?”
—Eric Rice, Head of Active Equities Impact Investing at BlackRock
By directing capital to the right companies, investors have the potential to generate financial return while building a better world.
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