Hope you are having a great week and welcome back to our brief thoughts on ESG. This week I’d like to address what we are hearing from the World Economic Forum and very broadly introduce the world of ESG indices. We may explore this at depth in future editions of this newsletter.
Has Davos turned green?
On the 50th anniversary of Davos, The Global Risks Report (for the first time ever) included 5 environmental risks in its “Top 5 Global Risks in Terms of Likelihood”. Climate action failure appears as the most central of these issues. The event seems to be full of panels, speeches, and even rules for the caterers that align with sustainability standards. Additionally, the World Economic Forum announced 140 of the world’s largest companies have agreed to align to a more standardized way to report ESG metrics.
Nevertheless, concerns on whether this is enough or even a true reflection of what participants are doing back in their home turfs remain. Furthermore, Donald Trump delivered a speech that still suggested his lack of support for environmental initiatives. And finally, this year’s PwC CEO survey, which is being widely commented in Davos, still shows little belief that climate initiatives will lead to significant new product and service opportunities (25% globally, 15% in the US).
Our take: Davos is certainly greener than before, and so are the mindsets of most global stakeholders (companies, investors, regulators, etc.). Challenges remain to keep raising the ESG bar across the board (standardizing the metrics to rate ESG compliance, properly quantifying the benefit of ESG compliance, etc.). But we believe we are on the right path as more people realize the relevance ESG is gaining will only increase over time.
Getting to know ESG indices
Can you guess how many indices there are globally? According to the Index Industry Association, there are almost 3 million. Within this huge universe, Blackrock estimates there are more than 1000 ESG indices. This implies ESG is one of the fastest growing index segments (no shocker there, delivering 14% YoY growth in 2019).
To construct an ESG index, index providers usually start with a parent index (which defines the universe of companies to be analyzed). From there a set of criteria are applied to comply with a certain theme or rating level and the weights are defined.
As for index providers, you can find ESG indices from the mainstream providers (MSCI, S&P DJI – with RobecoSAM, FTSE, etc) as well as from niche providers (KLD, WilderHill, Solactive). We don’t believe there is one index which is better than others in all aspects. As with ESG strategies, depending on which factors are more relevant to a given investment strategy, a specific index will be a better fit.
In Mexico we have less ESG indices. The Bolsa (BMV) has the S&P/BMV IPC Sustentable with 30 constituents and BIVA (the 2ndstock exchange in Mexico) will launch its FTSE4Good BIVA Index on January 30th. If we look at the LatAm level, we will find providers like MSCI or S&P DJI have a few (mimicking their non-ESG counterparts).
Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly
Partner, Miranda ESG
Contacts in Miranda Partners