MSCI’s Trends to Watch as Climate Change Takes Precedence in ESG Investing

An annual report to help investors “understand where the market conversation is likely to move and the type of risks and opportunities that could arise.”

Eddie Seal/Bloomberg

Eddie Seal/Bloomberg

Earth’s changing climate is now the most important topic to investors who consider environmental, social and governance issues when building investment portfolios, according to a new report by MSCI. Climate change surpassed corporate governance as the primary focus and the change is expected to drive new ESG trends in 2022.

Since MSCI published its first report on ESG trends a decade ago, some have come and gone. Tax fairness and data privacy were topics that received more attention in the past. Climate change and the value of human and natural capital have always been top investor concerns.

The focus on climate issues has grown for a few reasons, according to MSCI. The Paris Agreement, the international treaty to limit global warming by cutting global emissions, has shaped policies and economies since it was signed by 196 countries in 2015. Public concern is growing over rising sea levels and more frequent and severe natural disasters. Impassioned activists, like Swedish teenager Greta Thunberg, have also achieved high international profiles encouraging more people and companies to live differently in the name of the environment.

MSCI’s report is based on talks with thousands of companies and investors it interacts with throughout the year, the company told RIA Intel. Its purpose has always been “to help investors and advisors understand where the market conversation is likely to move and the type of risks and opportunities that could arise.”

“[This] gives us a pulse on the market and insight on what conversations are heating up and which are dissipating. Additionally, our ESG researchers are involved in analyzing emerging issues and industry developments, and we examine these various strands to collectively decide on what to highlight each year,” the company said.

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The top trends in this year’s report fall under three overarching categories: climate, the “mainstreaming” of ESG, and emerging risks and opportunities. Four of the top ESG trends in the 2022 report are directly related to the reduction and elimination of fossil fuels and achieving net-zero emissions.

The MSCI-termed “Amazon Effect” — large corporations applying pressure on their supply chain to align with net-zero emission goals — was one of the top trends. Increasing scrutiny and transparency from private companies and private-equity funds, the need for investors to go beyond divestment of coal to thinking about other ways to evaluate and leverage investments in companies and indexes, and the financing of climate adaption through green bonds, all rank in the top four trends.

Gabe Rissman, president and co-founder of YourStake, an ESG-focused data and reporting platform used by 150 RIAs managing more than $300 billion in assets, said increasing concern about climate issues aligns with the data collected by his company. Wealth managers can use YourStake’s behavior questionnaires to evaluate and score their client investment portfolios based on their ESG preferences. Out of more than 100 different ESG metrics, fossil fuel industry exposure is the most viewed metric on its website — 30 percent more than any other metric.

Women on boards, prisons, and environmental violations are other popular topics but interest in them relative to fossil fuels is significantly less, according to Rissman.

The establishment of common ESG-related vocabulary and definitions, as well as widely used research tools, are making ESG factors more accessible and favorable to investors and is another trend.

One trend was missing from MSCI’s report, according to Dennis Hammond, head of institutional investing at Veriti Management, a $1 billion direct indexing platform used by 200 institutions and private wealth managers.

“This next decade, people are going to finally get their arms around and require companies to work harder on excluding forced labor, human trafficking, and child labor from their global supply chains,” Hammond said.

Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.

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