Protest movements have elevated the profile of ESG investing to the point that financial advisors who dismiss its significance could miss out on attracting new clients as well as juicy returns for their existing clients’ portfolios. Below are three emerging trends in 2019 that advisors can discuss with their clients as presented by Linda Eling-Lee, global head of ESG Research at MSCI.
Corporate misbehavior will shine the spotlight on company boards.
Because leader misconduct incidents are up 22% annually, according to the MSCI ESG Controversies database, the spotlight will increasingly shine on chummy relationships that may exist between board members and the CEO, according to Lee, whose MSCI investment-relevant ESG research team is the largest in the financial industry.
“It’s the people sitting on a company board who are sometimes an obstacle to change because some of these boards are stacked with directors whose interests are not aligned with shareholders,” said Lee during a webinar on Jan. 24 that was moderated by MSCI podcast host Matt Moscardi. “In some cases, board members were appointed by the CEO more than a decade ago and may have relationships that create conflicts of interest.”
According to MSCI ESG Research, company responsiveness to controversy varies by level of investor influence. Among companies with low investor influence, only 14% would replace their CEOs in the event of a leadership misconduct issue compared to 44% of companies with high investor influence.
“Investors now realize that they can choose to either avoid these companies out right where they have little influence, own these companies and make sure that they've properly priced in the risk of having an unresponsive board in the event of a scandal or they can try to change them,” Lee said.
The China effect will increase plastic waste regulation.
From grocery bags and drinking straws to land use policy and global waste trade, regulating plastic waste will rise in prominence this year. That’s because China has placed limitations on how much it will allow other countries to import. Up until January 1, 2018, China and Hong Kong had been accepting some 70% of the annual waste produced globally since 1992, according to the MSCI 2019 ESG Trends to Watch report.
“Exporting countries like the UK and the EU are quickly moving towards reducing their export needs by implementing regulations on single use plastic because there isn't the infrastructure in place to manage the waste that can no longer be shipped to China, which is why there’s an uptick in talk about plastic waste and regulation,” Lee said.
For example, a ban on the use of single use plastic imposed by the European Parliament will take effect by 2021 and includes a mandate to recycle more than 90% of beverage bottles by 2025. “Everything from shirts to toys have plastic in it so investors are wrestling with the complexity of it,” said Lee.
Only 30% of industries have a formal policy aimed at reducing or phasing out plastic waste, according to the MSCI ACWI index. “We can map how an investor is exposed to plastic regulations but we're going to have to dig pretty deep to understand all the places that plastic waste will be an issue in an investor's portfolio,” Lee predicted.
ESG data will increasingly include alternative sources.
Only 35% of any given company’s rating derives from a company’s voluntary disclosure, according to MSCI data, with 65% coming from other data sets. “ESG data does not equal corporate disclosure and if you think of ESG data as only corporate disclosure then there actually isn't a lot of data,” said Lee.
In fact, the total ESG information landscape is growing beyond voluntary corporate disclosures with institutions spending some $900,000 every year on alternative-data sources, according to Greenwich Associates.
“A much more rapidly growing part of the ESG information landscape consists of data from a variety of sources, such as which companies have won awards for innovation or those companies that have been charged with bribery,” Lee said. Other examples of alternative data sets include geographic distance from high flood zones for power producers and biotech companies that have received violation notices from the U.S. FDA.