In Japan, on the other hand, Lee has seen the level of corporate ESG reporting and engagement skyrocket in the last year. She points out that GPIF, Japan’s government pension plan, is the largest in the world and Chief Investment Officer Hiro Mizuno is very passionate about including ESG data in portfolio analysis. Like other large developed market pension plans, GPIF is a universal owner of companies that are held in major market indexes. This requirement prohibits the plan from diversifying away from identifiable ESG risks, like gender-related biases in the workplace.
“Japan’s population is aging faster than other countries in the world and their labor pool is shrinking rapidly,” confirmed Lee. So, one issue GPIF is focusing on is workplace gender equality, with the intention of encouraging the country’s very well-educated female talent pool to actively participate in the workforce and help support continued growth of the economy.
Another global concern for many investors, according to Lee, is human capital vs artificial intelligence (AI) and digital technology development. As a result, this year’s whitepaper refers to 2018 as The Year of the Human. Lee pointed out that adaptation to new technologies and developing new skill sets for employees is a big concern of ESG analysis, but workforce information is generally guarded very closely by companies worldwide.
“Even the relatively sparse company disclosed workforce data we have captured over time at MSCI,” said Lee, “can differentiate companies with leading practices relative to their peers.” This data serves as a proxy for how much attention senior management pays to developing talent internally, she believes. In the U.S. investors like CalPERS, the California Public Employees Retirement System, lead a shareholder group that has petitioned the SEC for better workforce information disclosure by companies. Lee and her team are leading the way in addressing this lack of information across global markets.
Climate Scenario Testing And Other Challenges
A strong supporter of recommendations from the Financial Stability Board’s Task Force for Climate-Related Financial Disclosure (TCFD), Lee confirms that TCFD’s final report in 2017 has been a catalyst for investors to start asking how resilient their portfolios are to different climate scenarios. It is especially helpful here, she believes, that all of MSCI’s ESG ratings are industry specific and best-in-class, considering only the small number of ESG data points that are material to company performance in relation to industry peers.” Many companies have also begun to focus on top-down scenario analysis and long-range planning for up to 20 years based on TCFD’s recommendations.
MSCI’s ESG research across economic sectors and risk categories is part of climate scenario analysis. “Companies are trying to assess the trade-off between the physical risk to assets of continuing business as usual,” Lee commented, “and transition risk based on a long-term, low carbon economic scenario that creates stranded assets.” An example of the former would be the built infrastructure of firms that is subject to flooding from storms or seal-level rise. An example of the latter would be carbon reserves that are unburnable under a two-degree climate risk scenario but are currently valued on the balance sheets of oil and gas companies as burnable fossil fuel reserves.
Large asset managers like BlackRock and Vanguard have likely been talking to portfolio companies about these risks in the course of engagement, according to Lee. “Some companies need to be more transparent about their corporate governance and other ESG issues.”
In 2018 and beyond, Lee and her global team of analysts at MSCI will continue to follow ESG trends that they believe shape how investors approach the risks and opportunities of today and the future. “The steady growth in demand for material ESG data across developed and emerging markets,” said Lee, “is the best indicator of the value of our work to companies, investors and financial advisors alike.” She is clearly confident about MSCI’s strategic focus and leadership role in ESG research going forward.
Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.