MSCI to incorporate ESG risks into indices (amended)

KLD and Innovest teams to combine, says FT

Index firm MSCI, fresh from its $1.55bn (€1.28bn) acquisition of risk and corporate governance advisory firm RiskMetrics, is to create a new product including environmental, social and governance (ESG) factors (amends to clarify that it’s a new product).

Before being acquired by MSCI, RiskMetrics had been on a shopping spree itself, recently acquiring ESG research houses Innovest and KLD. The FT reported that these teams would now be merged and work on integrating ESG criteria into MSCI productss. KLD’s licensing agreement with MSCI’s rival FTSE is now under review, the FT added.

MSCI publishes more than 9,000 indices in real time and there are some $243bn of exchange traded fund assets linked to its indices. Its international equity indices are the benchmark for 90% of theinternational equity assets under management in the US. The FT said MSCI’s chief executive Henry Fernandez believes ESG criteria should be considered alongside traditional metrics, such as a share’s liquidity, in index calculation. He pointed to governance risks such as boards with cosy relationships with management, or companies where excessive pay might provoke a backlash.

The firm already offered custom indices reflecting ESG themes prior to the RiskMetrics purchase.

Meanwhile, RI understands that ISS, the proxy voting specialist that MSCI acquired as part of the RiskMetrics deal, is to remain separate within the merged firm. It will retain its own sales teams, billing and even staff email addresses. Fernandez has said MSCI views ISS as “non-core”.