MSCI has published their annual report, “2019 ESG Trends to Watch,” which explores five major ESG trends that will affect the financial markets throughout this year. A myriad of challenges, including policy, technological and climatic changes, currently face companies, asset managers and investors alike. According to the report, 2019 will see the following trends:
1. PLASTIC WASTE
MSCI has identified that more companies will potentially be exposed to plastic and plastic-related regulation. They state that during 2019 companies and investors will be forced to contend with the new reality: waste reduction not as a marketing priority, but as a business challenge.
2. REGULATION ON ESG INVESTING WILL GROW
This is a complex area that affects both the information that companies must provide and whether a product truly is sustainable as advertised. MSCI estimates as much as USD 32.6 trillion in assets under management could be subject to pending regulations or regulations in discussion, as of 2018.
3. CLIMATE-CHANGE IS A NEAR TERM PORTFOLIO THREAT
Climate change is already taking a toll on investments, especially in real estate portfolios, where properties in areas of rising sea levels are being discounted. Using aggregated MSCI Real Estate data on 456 commercial real estate assets in 200 Florida ZIP codes representing USD 22 billion in market value8, we found that 51% of the assets are in the vanguard of rising seas. One in five (20%) of these assets were constructed in flood-prone ZIP codes after the year 2000, meaning the properties could be affected by sea-level rise before the end of their usable life.
4. BIG SIGNAL REVOLUTION WILL CHANGE HOW ESG INFORMATION IS GATHERED
MSCI predicts that in 2019, investors will “turn their attention from data proliferation to signal proliferation, recognizing that the value of ESG data as a relevant factor depends as much on knowing why they own something as on knowing what they own.”
In gathering information about companies, MSCI uses not only company reports, but leverages “alternative data to fill the gap on disclosure,” Moscardi said. New “signal” sources are as varied as satellite images of parking-lot activity, job postings and land-use data, the report states. In fact, “IBM has estimated that 90% of data in use today was created in just the last two years.”
If investors just focused on company disclosure of issues, they would be missing much, according to the report, which found fewer than 1% of companies in autos, pharmaceutical and food industry disclosed comprehensive information on product safety recalls. Instead, the vast majority of that information was found through text-mining.
5. LEADERSHIP IN THE AGE OF TRANSPARENCY
Corporate scandals are front and center today, hitting stock prices hard. MSCI found there has been a 22% increase in company controversies in the past five years. And the reputational damage these scandals cause can last years.
MSCI believes 2019 will be the year that investors quit asking questions after a scandal, and instead ask before, “What are my rights as a shareholder?”
Even today, MSCI showed companies can have a tin ear. Those companies with low level of responsiveness to misconduct cases had 49% of their boards replaced, with only 14% of CEOs replaced. Those with the highest investor influence had 58% of boards replaced and 44% of CEOs replaced. As MSCI noted, “unless shareholders have recourse, companies are less likely to react to a controversy.”
The good news is pension funds such as Calpers are putting companies on notice that refreshing boards will be a prerequisite for their investment. In fact, starting in 2019, Calpers will vote against any board members who have been on longer than 12 years. They also will require diversity of the board.
As the report notes, “the age of transparency means there are fewer and fewer places for questionable corporate practices and even personal conduct to hide …. As a result, 2019 may mark a turning point for investors tired of paying the cost for companies slow to adapt when the internal becomes external and the whole world can judge misconduct for itself.”
To view the report click on the following link https://www.msci.com/www/blog-posts/esg-trends-to-watch-in-2019/01225995404