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Remy Briand, MSCI Florian Guldner, Opalesque Asia:

For institutional investors working a long-term investment strategy, environmental, social and corporate governance (ESG) factors are believed to be important drivers of risk and return: Impending environmental regulation and global labor disruption are issues that will increasingly affect large companies and their shareholders. Integrating those ESG factors into the investment process may help investors to identify ESG risks in companies and exploit opportunities stemming from those risks on a portfolio level.

A MSCI research paper published last month introduces an analytical concept designed to measure how well ESG factors are integrated in an equity portfolio and to quantify potential improvement.

Dimensions of and approaches to ESG investing The authors identify two dimensions of ESG investing: The financial dimension is crucial for "Universal Owners", i.e. long-term investors with broad market exposure and mainly deals with the problem of evaluating portfolio externalities which, in the short-term, might not be priced correctly by markets. The second dimension reflects investors' values and is based on moral views or the management of reputational risk (e.g. avoiding "sin stocks"). The ability to distinguish between the two motivations is necessary to design an ESG investment framework.

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