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ESG Investing: Finding Your Motivation

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ESG investing and common motivations

ESG Investing: Finding Your Motivation

Environmental, social, and governance (ESG) factors are a set of criteria that can be used to rate companies alongside traditional financial metrics.

Awareness around this practice has risen substantially in recent years, but how can investors determine if it’s a good fit for their portfolio?

To answer this question, MSCI has identified three common motivations for using ESG in one’s portfolio, which have been outlined in the graphic above.

The Three Motivators

According to this research, the three primary motivations for ESG investing are defined as ESG integration, incorporating personal values, and making a positive impact.

These goals are not mutually exclusive, though, and an investor may relate to more than just one.

#1: ESG Integration

This motivation refers to investors who believe that using ESG can improve their portfolio’s long-term results. One way this can be achieved is by investing in companies that have the strongest environmental, social, and governance practices within their industry.

These companies are referred to as “ESG leaders”, while companies at the opposite end of the scale are known as “ESG laggards”. From a social perspective, an ESG leader could be a firm that promotes diversity and inclusion, while an ESG laggard could be a company with a history of labor strikes.

To show how ESG integration may lead to better long-term results, we’ve compared the performance of the MSCI ACWI ESG Leaders Index with its standard counterpart, the MSCI ACWI Index, which represents the full opportunity set of large- and mid-cap stocks across developed and emerging markets.

ESG integration

The MSCI ACWI ESG Leaders Index targets companies that have the highest ESG rated performance in each sector of its standard counterpart. The result is an index with a smaller number of underlying companies (1,170 versus 2,982), and a relative outperformance of 7.9% over 156 months.

#2: Incorporating Personal Values

ESG investing is also a powerful tool for investors who wish to align their financial decisions with their personal values. This can be achieved through the use of negative screens, which identify and exclude companies that have exposure to specific ESG issues.

To see how this works, we’ve illustrated the differences between the MSCI World ESG Screened Index and its standard counterpart, the MSCI World Index.

ESG screening

The MSCI World ESG Screened Index excludes companies that are associated with controversial weapons, tobacco, fossil fuels, and those that are not in compliance with the UN Global Compact. The UN Global Compact is a corporate sustainability initiative that focuses on issues such as human rights and corruption.

#3: Making a Positive Impact

The third motivation for using ESG is the desire to make a positive impact through one’s investments. Also known as impact investing, this practice enables investors to merge financial gains with environmental or social progress.

Investors have a variety of tools to help them in this regard, such as the MSCI Women’s Leadership Index, which tracks companies that exhibit a commitment towards gender diversity. Green bonds, bonds that are issued to raise money for environmental projects, are another option for investors looking to drive positive change.

ESG Investing For All

With various angles to approach it from, ESG investing is likely to appeal to a majority of investors. In fact, a 2019 survey found that 84% of U.S. investors want the ability to tailor their investments to their values. Likewise, 86% of them believe that companies with strong ESG practices may be more profitable.

Results like these underscore the high demand that U.S. investors have for ESG investing—between 2018 and 2020, ESG-related assets grew 42% to reach $17 trillion, and now represent 33% of total U.S. assets under management.

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Mining

How to Avoid Common Mistakes With Mining Stocks (Part 5: Funding Strength)

A mining company’s past projects and funding strength are interlinked. This infographic outlines how a company’s ability to raise capital can determine the fate of a mining stock.

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Funding Strength

A mining company’s past projects and funding strength are interlinked, and can provide clues as to its potential success.

A good track record can provide better opportunities to raise capital, but the company must still ensure it times its financing with the market, protects its shareholders, and demonstrates value creation from the funding it receives.

Part 5: The Role of Funding Strength

We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Part 5 of the series highlights six things to keep in mind when analyzing a company’s project history and funding ability.

Funding Strength

View all five parts of the series:

Part 5: Raising Capital and Funding Strength

So what must investors evaluate when it comes to funding strength?

Here are six important areas to cover.

1. Past Project Success: Veteran vs. Recruit

A history of success in mining helps to attract capital from knowledgeable investors. Having an experienced team provides confidence and opens up opportunities to raise additional capital on more favorable terms.

Veteran:

  • A team with past experience and success in similar projects
  • A history of past projects creating value for shareholders
  • A clear understanding of the building blocks of a successful project

A company with successful past projects instills confidence in investors and indicates the company knows how to make future projects successful, as well.

2. Well-balanced Financing: Shareholder Friendly vs. Banker Friendly

Companies need to balance between large investors and protecting retail shareholders. Management with skin in the game ensures they find a balance between serving the interests of both of these unique groups.

Shareholder Friendly:

  • Clear communication with shareholders regarding the company’s financing plans
  • High levels of insider ownership ensures management has faith in the company’s direction, and is less likely to make decisions which hurt shareholders
  • Share dilution is done in a limited capacity and only when it helps finance new projects that will create more value for shareholders

Mining companies need to find a balance between keeping their current shareholders happy while also offering attractive financing options to attract further investors.

3. A Liquid Stock: Hot Spot vs. Ghost Town

Lack of liquidity in a stock can be a major problem when it comes to attracting investment. It can limit investments from bigger players like funds and savvy investors. Investors prefer liquid stocks that are easily traded, as this allows them to capitalize on market trends.

Hot Spot:

  • A liquid stock ensures shareholders are able to buy and sell shares at their expected price
  • More liquid stocks often trade at better valuations than their illiquid counterparts
  • High liquidity can help avoid price crashes during times of market instability

Liquidity makes all the difference when it comes to attracting investors and ensuring they’re comfortable holding a company’s stock.

4. Timing the Market: On Time vs. Too Late or Too Early

Raising capital at the wrong time can result in little interest from investors. Companies in tune with market cycles can raise capital to capture rising interest in the commodity they’re mining.

Being On Time:

  • Raising capital near the start of a commodity’s bull market can attract interest from speculators looking to capitalize on price trends
  • If timed well, the attention around a commodity can attract investors
  • Well-timed financing will instill confidence in shareholders, who will be more likely to hold onto their stock
  • Raising capital at the right time during bull markets is less expensive for the company and reduces risk for investors

Companies need to time when they raise capital in order to maximize the amount raised.

5. Where is the Money Going? Money Well Spent vs. Well Wasted

How a company spends its money plays a crucial role in whether the company is generating more value or just keeping the lights on. Investors should always try to determine if management is simply in it for a quick buck, or if they truly believe in their projects and the quality of the ore the company is mining.

Money Well Spent:

  • Raised capital goes towards expanding projects and operations
  • Efficient use of capital can increase revenue and keep shareholders happy with dividend hikes and share buybacks
  • By showing tangible results from previous investments, a company can more easily raise capital in the future

Raised capital needs to be allocated wisely in order to support projects and generate value for shareholders.

6. Additional Capital: Back for More vs. Tapped Out

Mining is a capital intensive process, and unless the company has access to a treasure trove, funding is crucial to advancing any project. Companies that demonstrate consistency in their ability to create value at every stage will find it easier to raise capital when it’s necessary.

Back For More:

  • Raise more capital when necessary to fund further development on a project
  • Able to show the value they generated from previous funding when looking to raise capital a second time
  • Attract future shareholders easily by treating current shareholders well

Every mining project requires numerous financings. However, if management proves they spend capital in a way that creates value, investors will likely offer more funding during difficult or unexpected times.

Wealth Creation and Funding Strength

Mining companies that develop significant assets can create massive amounts of wealth, but often the company will not see cash flow for years. This is why it is so important to have funding strength: an ability to raise capital and build value to harvest later.

It is a challenging process to build a mining company, but management that has the ability to treat their shareholders and raise money can see their dreams built.

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Investor Education

Emerging Markets: A Growing Set of Opportunities

Spanning nearly 30 countries around the world, emerging markets can offer plenty of opportunities for growth-minded investors.

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BlackRock Emerging Markets

Emerging Markets: A Growing Set of Opportunities

With growth portfolios becoming increasingly focused on China, investors may develop a tendency to overlook the broader emerging markets universe.

To shed a light on some lesser-known opportunities, this infographic from BlackRock explores the evolving landscapes of Southeast Asia, Brazil, and India.

Putting Opportunity Into Perspective

Emerging markets often exhibit lower price/earnings ratios (P/E) when compared to developed markets. While this may suggest that the region is attractively priced, investors can also view emerging markets from a relative size perspective.

Here’s how the market capitalisations of several emerging markets compare to some of the biggest names in tech.

CountryTotal Country Market Cap (USD)Comparable toCompany Market Cap (USD)
India$2,111BApple$1,981B
Brazil$711BFacebook$746B
Thailand$428BTesla$401B
Indonesia$381BNvidia$334B
Philippines$270BNetflix$221B

As of September 2020. Source: CEIC, Ycharts

Investors often focus on tech companies when seeking long-term growth, but with valuations at their highest levels since the dot-com bubble, uncertainty could begin to rise.

That’s where emerging markets can come into play. A country such as Brazil, which contains over 400 listed companies, may offer enhanced returns and diversification when compared to a single company. To learn more, here’s a closer look at three emerging markets opportunities that might be flying under your radar.

1. Southeast Asia: A Rising Digital Economy

Southeast Asia (SEA), which includes Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, is quickly emerging as the next digital giant. The region is currently home to an online population of 400 million people, a 53% increase from 2015.

With so many people going online, companies such as Grab, a local ride-share provider, have accumulated millions of new users. This spells good news for investors, with SEA’s internet economy expected to reach a gross merchandise value (GMV) of $309B by 2025.

YearSEA Internet Economy GMV* (USD)
2015$32B
2019$100B
2020 projected$105B
2025 projected$309B

*GMV is the total value of merchandise sold through a customer-to-customer exchange site.
Source: Google, Temasek, Bain & Company

Favourable demographics are also contributing to this growth. The region is expecting 50 million entrants to its middle class by 2022 and has an average age of just 30.2 years. That’s roughly 10 years younger than the UK, and 18 years younger than Japan.

Furthermore, this growing cohort of wealthier consumers is already embracing technology. Ecommerce, a subsector of SEA’s internet economy, has added 100 million new users over the past 5 years, with GMV increasing from $5 billion in 2015 to $62 billion in 2020.

2. Brazil: Improvements in Gender Diversity

Gender diversity has been a historical weak point for Brazilian companies, but female representation in the country has been improving. Here’s how the percentage of women on corporate boards differs between Brazil, emerging markets, and developed markets.

YearBrazil (n=53)MSCI Emerging Markets Index (n=1,323)MSCI World Index (n=1,584)
20165.8%9.0%20.3%
20178.4%10.2%20.4%
20188.0%11.2%21.6%
201911.9%12.1%25.0%
202013.7%13.0%26.2%

Source: MSCI

Brazil surpassed the emerging markets average in 2020 thanks to increased awareness and initiatives by its financial sector. Brazil’s B3 exchange, for example, was the first stock exchange in the Americas to sign the Women’s Empowerment Principles, an initiative by UN Women.

Greater female representation is welcome news for both investors and society alike. Research from the Boston Consulting Group found that companies with above-average diversity tended to be more innovative, generating a greater share of revenue from recently launched products.

3. India: Promising Opportunities in Healthcare and Real Estate

As part of its National Health Protection Scheme, India’s government is looking to provide 500 million people with government-sponsored health insurance. If progress is kept on track, health sector revenues could increase at a compound annual growth rate (CAGR) of 18%, making it one of the world’s fastest growing markets in the world.

YearRevenue from India's Healthcare Sector (USD)
2016$140B
2017$160B
2020 Projected$280B
2022 Projected$372B

Source: IBEF

Achieving this goal will require participation from both the public and private sectors. For example, India’s government has pledged to increase public health spending from 1.1% of GDP in 2018, to 2.5% by 2025. Additionally, it allows 100% foreign direct investment (FDI) in projects such as hospitals.

India is adopting a similar strategy for real estate, which has struggled to keep up with growing demand. In India’s top eight cities, the housing deficit amounts to over 3 million units.

 
Indian Real Estate
Income GroupDemandSupplyDeficit
Lower income1,982,00025,0001,957,000
Middle income1,457,000647,000810,000
High income717,000351,000366,000
Total4,156,0001,023,0003,133,000

Source: IBEF

To accelerate development, India’s government has allowed 100% FDI in residential and retail developments since 2018. Analysts believe that the country’s real estate market could become the third largest in the world by 2030.

There’s More Than Meets The Eye

Over the span of a few years, China has grown to comprise nearly 40% of the MSCI Emerging Markets Index—but this doesn’t mean that China should receive all of the attention from investors.

With almost 30 countries to explore, China and the opportunities discussed above are just a subset of what emerging markets have to offer. For growth-minded investors, giving this diverse region a closer look could be rewarding.

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