A three-way collaboration between Northern Trust, MSCI and governance consultancy ISS will provide the first emerging markets ESG index for managers and big investors to track or measure themselves against.
Northern Trust’s passive funds management arm has a corresponding fund for the new MSCI Emerging Markets Custom ESG Index, which was announced in London last week.
The process comprises four steps: three screens are applied to the MSCI EM Index universe, followed by a sequence of checks on governance and executive independence.
The first three screens were determined based on common factors for norms-based and industry screening criteria identified in consultation with Northern Trust’s existing European investor clients.
The first screen eliminates constituent companies of the MSCI EM Index that have been found to be in breach of the UN Global Compact’s 10 principles. The second screen removes manufacturers of controversial weapons such as cluster bombs and landmines. Tobacco products manufacturers are also excluded.
Following these exclusions, any constituents lacking sufficient independence across ownership, board representation, key corporate committees and audit and remuneration committees are filtered out.
“This index is unique in combining industry screens, norms-based screens and governance screens,” according to Thomas Kuh, executive director, MSCI ESG Indices. “Research shows that good corporate governance matters and the addition of the governance screen should improve the quality of the companies in the index from an ESG perspective.”
Emerging markets still concern some institutional investors because of a perceived slackness in oversight of governance standards by some of the companies and even the local regulators.
Northern Trust manages about $US20 billion in SRI-screened assets around the world. It launched an ESG global equity fund late last year.
“We believe there are three key drivers behind the growth in ESG considerations,” according to Mamadou-AbouSarr, senior product specialist for global index management at Northern Trust. “These include: the obligation of asset owners to abide by their internal governance policies; or the broader regulatory environment; and the growing recognition of the importance of ESG as an investment theme.”