MSCI wins "Best ESG Paper 2019"
Many different topics now fall under the environmental, social, and governance-related umbrella. Environmental subject matter might discuss pollution, deforestation, or climate change. The Social aspect could cover labor laws, responsible investment practices, or financial inclusion. And Governance topics could include board diversity or the prevention and management of corporate scandals, corruption, and fraud. One can also frame ESG discussions around risk analysis, ESG scoring, or ESG issues in different global regions. Given the breadth of this subject, it is fitting that this year's Best ESG Paper, from MSCI, details five separate ESG trends for investors to be mindful of.
In this paper, MSCI explores five ESG trends: (i) the need not only to reduce plastic waste but also to provide biodegradable alternatives; (ii) increasing regulatory pressure for ESG disclosures from companies and investors; (iii) the accelerated impacts of climate change and their investment implications; (iv) the ability to use a panoply of ESG data to extract valuable signals; (v) learning good governance in an age of corporate transparency.
This DWS-sponsored report by CREATE-Research describes how index funds are becoming mainstream within buy-and-hold pension portfolios. Index fund investors have also begun to focus, within these funds, upon stewardship and the ability to create positive outcomes through proxy voting. Index funds are increasingly used within the core portion of a portfolio to target beta exposure, while active funds target alpha.
AQR discusses the risk and return implications of incorporating Environmental, Social and Governance (ESG) considerations into an investment strategy. They focus on the risk side in particular and argue that ESG exposures may be informative about the risks of individual firms. They find clear support for this hypothesis in the data. Stocks with worse ESG exposures have total and stock-specific volatility that is up to 10-15% higher, and betas up to 3% higher, than stocks with the best ESG exposures.
The authors of this report introduce the concept of EROCI (Energy Return on Capital Invested) in order to show how much useful energy is received from a $100bn outlay on oil (for gasoline powered light vehicles) versus the same amount spent on wind and solar energy for electric vehicles. The combination of wind and solar energy projects for EVs will produce 6-7x more useful energy. Indeed, oil's days are numbered, as renewables are cleaner, easier to transport, and could soon replace around 40% of global oil demand.
For compliance reasons, this paper is only accessible in the UK & Europe
Candriam describes the roles that 'green' minerals and metals will play within the transportation and energy sectors, as we continue to make technological progress and transition towards sustainable practices. Cars will increasingly be made from lighter metals such as high-resistance steel and aluminum, platinoids will remain in demand for use in catalytic converters, and EV adoption will lead us closer to a zero-emission world.
In this 17-page reprt, the authors examine ESG scoring, specifically looking at the consistency of ESG scores across different vendors of ESG data. Environmental scores exhibit consistency from vendor to vendor, while Social scores are slightly less consistent, and Governance scores are very inconsistent. As a result, Qonitgo/Axioma's overall recommendation is for asset managers to utilise granular ESG data that drills down into the individual components of E, S, and G, rather than composite ESG scores.
DWS Asset Management discusses a host of ESG issues within emerging market economies, including urbanisation, forced labor, financial inclusion, climate risks, corruption, and political risks. Urbanisation, for instance, creates strains on existing infrastructure and often leads to increased pollution, land degradation, and water shortages. Pressure is now mounting for EM corporates to abide by TCFD guidelines and disclose ESG-related data, as well as for EM asset managers to become UN PRI signatories.
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