MSCI expects investor focus beyond companies’ ESG disclosure

Jan 23, 2018
‘Voluntary disclosure has limits in providing full picture of companies’ ESG risks,’ report states

Investors will this year be looking at more than companies’ self-disclosures as they try to get a handle on the risks posed to corporates by ESG issues, according to a new report.

The authors of the MSCI paper note that institutional investors are pushing companies to ramp up disclosure about their ESG practices. ‘Companies are responding, but voluntary disclosure has its limits in providing a full picture of companies’ ESG risks,’ say Linda-Eling Lee, global head of ESG research, and Matt Moscardi, head of the financial sector for MSCI ESG research.

‘In 2018, we anticipate that the disclosure movement reaches a tipping point, as investors seek broader data sources that can balance the corporate narrative and yield better signals for understanding the ESG risk landscape actually faced by portfolio companies.’

MSCI uses voluntary sustainability disclosures as part of its ESG ratings process and sees both that ‘corporate resistance is increasingly futile’ against pressure from investors for more transparency and that the volume of disclosure is increasing, Lee and Moscardi say. ‘Corporate disclosure is necessary and more is needed,’ Lee told the audience of a webinar on the report last week. ‘It’s necessary but not sufficient to assess all ESG risks and opportunities.’

She added that, although it is unfair to call corporate disclosures ‘greenwashing,’ there can be a tendency for it to focus on good rather than bad news. She pointed to other public resources investors can look to, including academic studies and enforcement databases.

‘Whether disclosure is voluntary or mandatory, [corporate disclosure] may not provide a full picture of a company’s practices or reveal obvious lapses in internal controls,’ Lee and Moscardi write in the report. They cite a 2017 PwC survey as finding that 62 percent of US investors don’t ‘have enough trust in the information companies report’ to be confident in investment analysis and decisions.

‘What this suggests is that an objective signal of a company’s ESG risks cannot primarily be driven by an issuer’s own corporate narrative, particularly when much of that narrative is purely voluntary and not subject to regulatory (or even auditor) oversight,’ the authors say.

Among other things, they predict that investors in 2018 will use ESG signals to help navigate emerging markets investments, expand their view of portfolio climate risk from company carbon footprint to macro-level exposures across asset classes, and adopt ESG factors in fixed income investments.

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