MSCI is an American finance company which provides portfolio analysis tools related to equity, fixed income, real estate, and ESG. Their first ESG index was launched in 1990, and they’ve been rating companies for material ESG risks since 1999. Most recently, the company won the Sustainable Investment awards of best ESG assessment tool of the year and best ESG data initiative of the year, amongst other recognitions for their contribution to sustainability.
The MSCI Sustainable Impact Index highlights companies whose core business aligns with one of the 17 UN Sustainable Development Goals (SDGs). It is based on the MSCI All Country World Index, which was designed to track broad global equity-market performance. The criteria of the Sustainable Impact Index differs based on data from MSCI ESG Research.
Inclusion in this index requires companies to generate at least 50% of their sales from one of more of the 11 Sustainable Impact categories generated by MSCI:
Nutritious products
Drugs for major diseases
Sanitary products
Education
Affordable housing
Loans to small and medium sized enterprises
Alternative energy
Energy efficiency
Green building
Sustainable water
Pollution prevention
Companies must also maintain minimum ESG standards i.e. responding appropriately to ESG risks.
MSCI’s Sustainable Impact Index contains 162 holdings in total. The top 3 holdings and their weighting in the index are:
Daiwa House Industry (4.38%) = Japanese real estate
Affordable housing, Green building = SDGs 1, 8, 9 & 11
Novartis (4.02%) = Swiss Pharmaceuticals
Drugs for major diseases = SDGs 3 & 9
Johnson Matthey (3.54%) = UK Chemicals
Energy efficiency, pollution prevention = SDGs 9 , 12 & 13
This index was developed in partnership with the Organisation for Economic Cooperation and Development (OECD), where an SDG alignment tool was designed to assess the net contribution of companies towards key global challenges. It is particularly useful for investors who want to have a greater impact whilst gaining suitable returns.
Investors and portfolio managers can use the MSCI Sustainable Impact Index by taking inspiration from the holdings it includes. It gives a clear indication of which companies are working towards the SDGs as well as meeting the minimum requirement of ESG standards that other less specific indices also mention. The index cannot be directly invested in, but it can be fully or partially replicated through a mutual fund (pooling money from many investors to invest in a portfolio of stocks, bonds or other securities, based on dollars), or an Exchange-Traded Fund (based on market price and can only trade full shares).
Hence this index allows an impact-seeking investor to “define actionable thematic allocations in line with the SDGs.” The 5 actionable impact themes which MSCI ESG Research identified are:
Basic Needs = SDGs 1, 2, 3, 6 & 11
Empowerment = SDGs 4, 5, 8, 9 & 10
Climate Change = SDGs 7 & 13
Natural Capital - SDGs 12, 14 & 15
Governance = SDGs 16 & 17
Overall, thematic indices like the MSCI Sustainable Impact Index are beneficial for categorizing companies based on global ESG goals, so stakeholders can find companies which they align with to make the breadth, depth, and permanence of their impact even greater.
Author: Safeena Khan
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