MSCI ESG Research to rate mutual funds and ETFs on sustainability factors

Index firm MSCI has expanded its MSCI ESG Research coverage to include approximately 21,000 mutual funds and exchange traded funds (ETFs) in a response to increased client demand.

It follows rival Morningstar, the fund rating giant, which on March 1 formally introduced the sustainability rating of funds that was heralded by its agreement last year with environmental, social and governance (ESG) research house Sustainalytics.

Now, RI can report that MSCI ESG Fund Metrics will measure the ESG characteristics of portfolio holdings and rank or screen funds based on factors including sustainable impact, values alignment and ESG risks, including carbon footprint. The move has the backing of the likes of Bank of America Merrill Lynch, Nordea Asset Management and Credit Suisse, MSCI said. Morningstar has said that Swiss private banking group Julius Baer would be its first client to license the ESG scores for its fund research team.

“The development of Fund Metrics was based on client consultation, which included some of the world’s largest wealth managers who are looking for greater insight into the ESG attributes of their portfolios, reflecting growing attention to ESG among investors,” said Eric Moen, Managing Director of MSCI ESG Research. He said the demand from clients wanting to consider ESG criteria to align their investments with their values is “continuously increasing”.The move was a “natural extension” of its ESG ratings and research. Each fund will receive an overall score, the ‘Fund ESG Quality Score’, a peer group percentile rank and individual E- S- and G- scores.

Clients will also have access to over 100 Fund Metrics to evaluate the ESG attributes of their portfolio in three categories: sustainable impact, values alignment and risks.

To complement the launch, MSCI has published a paper called ‘Fund Transparency: Exploring the ESG Quality of Fund Holdings’. It found that government bond funds and European equities scored highest on ESG Quality, while small‐cap US, emerging market equity, and high yield bond funds scored lowest.

And it also found that 146 diversified US equity funds had over 10% exposure to companies owning high‐impact fossil fuel reserves like coal or oil sands.

Intriguingly, MSCI identified just over 1,000 US equity funds – with $825bn in net asset value – that are virtually ‘fossil fuel free’, even though very few if any were marketed as such.

“We identified 3,158 funds across asset classes with significant exposure to sustainable impact themes (like alternative energy, health care, nutrition), representing nearly $1.8trn in net asset value. Of these, only 14% were identified by MSCI ESG Research as specialized thematic or sector funds,” the firm said.