If you were an advisor focused on environmental, social and governance corporate ratings you probably would not have been be surprised by the Vale dam collapse in Brazil, the bankruptcy filing by Pacific Gas & Electric in California, or the financial scandal at Nissan.
Problems at these companies were not new, according to Linda-Eling Lee, global head of ESG Research at MSCI, one of the major providers of ESG corporate ratings. “The track record was really there.”
Even if companies don’t file corporate social responsibility (CSR) reports annually — though an increasing number do — the information they contain is available elsewhere due to advances in big data and machine learning, and even reports from the Consumer Financial Protection Bureau, said Lee, referring to federal agency that in 2016 found Wells Fargo had opened 1.5 million unauthorized accounts. She was one of several members of a panel at the Inside ETFs conference in Hollywood, Florida, discussing the benefits of using ESG ratings when investing in securities, including equity indexes.
The track record is also there for ESG indexes, which in most cases slightly outperform traditional benchmarks and in some cases, like emerging markets, outperform by more than a little, said Lee.
Investing according to ESG principles can help financial advisors beyond performance and risk reduction in their client portfolios.
They can also help advisors “defend their investment choices to clients when those choices are out of favor,” said Vince Birley, CEO of Vident Financial.
And they align with clients’ focus on long-term returns, according to Birley. The metrics that drive long-term returns include value, quality earnings, cash flow, diversification and good leadership and governance — the “G” in ESG, said Birley, whose firm offers three ETFs based on those core principles: a U.S. and international equities ETF and fixed income ETF.
There is currently no common set of ESG principles and measures, but there are many companies providing ESG measurements and indexes, including MSCI, which Birley uses, as well as Nuveen.