Investing Strategies: Taking Stock Of The ESG Investing Trend


hi everyone and welcome to investing
strategies it’s Alissa Coram with Investor’s Business daily from the
Nasdaq market site in Times Square and this week we’re focusing in on the ESG
Investing trend and MSCI’s head of ESG research is here to talk about the
methodology behind its ESG ratings and the development of MSCIs indexes
many of which are being turned into ETFs plus we’re taking a look at a few stocks
that made the gist released IBD ESG 50 list an elite group of companies with
high ESG ratings and high Ivy composite ratings and we’re sitting down with the
Nasdaq analyst to learn more about key ESG issues from an investor perspective
and what companies are doing to address those concerns Investing Strategies
starts now okay let’s begin with this week’s market
insights the major indexes dipped last week ending their multi week wind
streaks we saw the Nasdaq Composite finished down three tenths of a percent
for the week but that was after rising some seven point six percent in the
prior seven weeks the tech-heavy index has also been able
to close above 8500 since November 15th even with multiple tests of that
psychological level plus breakouts from top stocks are working and more sharp
looking chart patterns are forming the earnings picture remains bright – and in
the IBD 50 list of leading growth stocks the median Q for EPS estimate calls for
a 20 point 5 percent rise year-over-year all that together presents a strong case
for the Bulls and a market rally that could last through the end of the year
but investors should definitely keep a close eye on the action in the major
indexes and individual stocks in order to act quickly if the market takes a
bearish turn and with that let’s turn our attention
to this week’s spotlight on ESG for the uninitiated that’s environmental social
and governance and many investors are now incorporating ESG filters in their
investment decisions investors business daily just released an ESG special
report and we partnered with MSCI to come up with a list of 50 top stocks
that not only have high ESG ratings but they also have top-notch fundamental and
technical IBD characteristics – here with me now to shed light on the growing
ESG investing trend is Linda-Eling Lee Head of ESG research at MSCI thanks so
much for joining me today Linda it’s great to be here all right so the fact
that we have all of these companies that have not only strong ESG ratings but are
really making strong price gains stock wise – what what does that say to you
well I think that it really makes a great deal of sense to put them together
the way IBD has and I think that it’s great for two reasons one is that when
we think about high quality companies they can be high on financial quality
but also for ESG really what we’re trying to measure is their resilience to
long term emerging risks and opportunities so you’re kind of doubling
up on higher quality companies and the second reason is that our research has
shown that financial quality and ESG are actually correlated they’re not quite
the same thing but they are correlated so at least you’re going in the right
direction when you combine them together this way okay so let’s drill down just a
little bit and talk about what goes into the ESG ratings how how are you coming
up with them so the ESG rating is aiming to capture the resilience of companies
to emerging ESG risks and opportunities relative to their industry peers so the
way to think about it is that it’s a competitiveness measure really in an
industry where ranking companies from the ones that are the best at managing
their ESG risk – the ones that are maybe a little bit more of a laggard so a few
things to know about these ratings the first thing is that they do range from a
top of a triple-a to a triple C in every single industry now this is not a case
where we’re going to give the healthcare stocks all the a ratings and the energy
stocks all the C ratings they really are actually in the
relative rankings and then beyond that the most important thing is that these
are industry specific so that means that for every single industry what goes into
contributing to the ratings is going to differ quite a lot between one industry
and another so if you have a utilities company what actually contributes quite
a lot to the ratings might be carbon emissions its water use but for a food
company it would be a totally different set of financially material ESG factors
that might contribute so it would be food safety for example or a supply
chain management and then the third thing to know is that it’s really a gap
analysis what we’re really trying to measure is the level of exposure that a
company has to any issue risk and how well they’re managing it and then
finally for all the different companies the regardless of their sector we’re
really looking at the strength of its governance look at the corporate
governance and and how well aligned the management’s and incentives are with
shareholders is a really fundamental part of a company’s the ESG rating
interesting and yeah it seems like maybe for the Millennial investor they might
be more familiar with perhaps the e for environmental as first social but less
familiar with governance but that seems pretty key to the metrics yeah we
definitely think of that as being really the foundations of whether or not a
company is well-managed and has great strong oversight right so I think that
the extent to which you can trust whether a company is managing and
monitoring its environmental or social risk really need to rest with the
foundation that the company is actually well governed right and you mentioned
that depending on which industry the company is in the the metrics or or what
factors you’re looking at are a little bit different so how does MSCI go about
capturing insights from data that that might be hard to mine yes this is a very
challenging area in the issue is the data and we really are looking at about
a thousand different metrics that we’re putting into the SU rating of any given
company you can think about them in their two buckets of data sources the
first bucket would be company disclosed information and that would include
company self disclosure that are regulated so there
financial disclosures as well as things that they would like to disclose that
are voluntary so things they put on their website about their human capital
management strategies or or perhaps their sustainability reports but
essentially these are self-reported corporate data that makes it maybe 40 to
50 percent of an ESG rating the remainder is actually coming from a lot
of other alternative data sources they include government databases so we very
very strongly monitor sources such as product safety recall databases consumer
complaints bureaus anything like that health and safety statistics there’s
also new sources we are monitoring around the world in many different
languages all the news that may actually produce controversial cases around
around companies around the world and then finally we also really use academic
and NGO databases where what we’re doing is looking at things like the map of the
world where there are areas of water stress for example and we can overlay
that with companies operations to get a sense of where there might be
environmental stress in their operations hmm and MSCI is also making these
ratings accessible to the public now right yes actually we had a very
exciting announcement this morning that you know we rate about 10,000 issuers
and that’s 7,500 companies or so and we’ve made the ratings of 2,800
companies available to the public if you go to MSCI.com you can simply search
for a company and its rating will come up awesome and not only can investors
get into the ESG trend by investing in individual stocks but also ETFs are
becoming increasingly popular and ESG related inflows I think it you know it’s
been a record-setting year for that and we do have a lot of ESG ETFs that are
based on MSCI ESG indexes yes absolutely so from an index perspective your MSCI is a leading equity index provider with over 15 trillion dollars of asset
that are tracking MSCI indexes and within that segment there are ESG
indexes and we calculate up over a thousand ESG indexes and so this is a
wide diversity of indexes because investors have very different demands
and objectives when it comes to integrating ESG the kind of landscape
maybe if I can give you some of the landscape around here she indexes and
then the ETF’s that are tracking them on one end of the spectrum you have the
more thematic indexes that are trying to get exposure to very specific themes so
the global environment index for example would be maximizing exposure to clean
tech companies you’re going to get a lot of sector concentration in that type of
a theme gender divide diversity is another very popular theme so the
empowering women’s index in Japan for example something that the government
pension plan there has allocated several billion dollars to tracking and
selecting companies that have demonstrated a greater ability to retain
and attract women which is an important policy objective in Japan now at the
other end of the spectrum where I think a lot of the ETFs are are starting to
track are the indexes that are designed to meet the objectives of investors that
still want to be fully diversified so they actually do still want the same
exposures to the different sectors and the different geographies as a market
cap benchmark however they want to be able to dial up the ESG exposures of
those indexes and so what we do is look at the take a market market cap based
index and what we do is we weight the companies that have higher ESG ratings
or they have higher ESG profiles those so the MSCI ESG focus or the MSCI ESG
Universal indexes are doing that for for investors that want to track them okay
and then in terms of the ETFs there are now 165 ETFs that are tracking one of
the MSCI EHD indexes about 21 billion dollars of assets now and we really see
the trend for ETFs really focusing on the end of the market
it is actually looking at the full sector exposures and really just trying
to weight the companies that are constituents of these indexes that are
higher in terms of ESG profile okay so we do have a range then of of indexes
and ETFs can you talk a little bit about the development of of some of these more
custom indexes perhaps yes so we see a wide range of indexes that that our
clients are looking to develop and and some of them will then put ETS on to
track some of these indexes so some of the trends that we see are in terms of
themes climate is a very big one I think that there is a lot of focus on looking
at indexes that have more of a climate aware characteristic to them so and we
also see a lot of interest in marrying factors with ESG so these are smart beta
type of indexes that have an ESG overlay you know you’re going to see a wide
variety of ETF options and fund options more generally I think over the next
couple of years because the pipeline is really very full for new ESG products
right and then I think with that where do you see the the future of ESG
investing headed clearly there’s going to be a wider availability and array of
vehicles for investors to really gain exposure to this trend which seems to be
an increasingly important lens through which people are making investing
decisions oh absolutely and one thing I think in terms of gaining exposure in
your portfolio to ESG you don’t have to limit yourself to just the funds or just
the ETFs that have an ESG label or a sustainable investing label of some sort
the tools and the data are now available for you to be able to look at the ESG
characteristics of all funds and ETFs so we actually MSCI provide ESG fund
ratings for over 35,000 mutual and ETF mutual funds and ETFs and you are able
to look at the HD quality of all these funds as well as
certain ESG metrics such as the carbon emissions of each of these funds so it’s
much easier now to be able to compare different funds whether or not they call
themselves sustainable or or ESG that’s a really good point thanks so much for
bringing that up and for shedding light on this really rapidly growing area of
investor interest Thank You Linda and coming up next I’ll be getting technical
with some of the stocks on the IBD yes you can you list are we ready to do this
okay here we go good morning everyone and welcome to IBD Live IBD Live is for
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learning in the stock market is a lifelong adventure and I think IBD live
helps make it an exciting and hopefully a profitable well it turns out that finding companies
with top performing stocks and strong fundamentals doesn’t have to mean a
trade-off with environmental social and governance values I be recognized 50
companies with triple-a or double-a ESG ratings from MSCI and rank them by
composite rating that’s a proprietary ranking from IBD that looks like key
fundamental and technical metrics including earnings and sales growth
profit margins return on equity and relative price performance Microsoft and
Edwards Lifesciences are two top stocks that made the list so let’s analyze them
starting with Microsoft now Microsoft earns a triple-a ESG rating from MSCI
and at the time of Ivy DS ESG report it had an IBD composite rating of 96 out of
99 and Microsoft has been on a strong run this year the tech giant has
provided investors with several buying opportunities along the way we had a
breakout from a cup with handle base back in February a flat base breakout in
June and another flat base breakout in late October Microsoft is now about 5%
above this one 42 47 entry and we can even get a closer look at that on a
daily chart now you want to make sure you’re buying a stock within the 5% buy
zone that way you’re not chasing a stock the more extended a stock gets from a
proper entry the greater chance it has of pulling back now in terms of
fundamentals Microsoft has now had five quarters in a row that both earnings and
sales growth were in the double digits and analysts expect to double digit
earnings growth to continue on an annual basis in the next fiscal year – among
Microsoft’s ESG initiatives include the creation of a chief privacy officer
position to tackle data privacy concerns and the formation of an internal group
that looks at ethical issues surrounding artificial intelligence
now pivoting over to Edwards Lifesciences a med tech company that
makes replacements for patients with faulty heart valves Edwards earns a
double A ESG rating from MSCI and has a highest possible composite rating of 99
from IBD since breaking out of a cup with handle base in late July Edwards
Lifesciences has gained some 23 sent shares have rebounded off of
support at the ten-week line along the run providing investors several
opportunities to add to their positions and for investors who feel like they
miss their chance wait for another proper entry to form before buying and
like Microsoft Edwards has strong fundamentals to the company has had two
quarters in a row of accelerating sales growth and three consecutive quarters of
accelerating earnings growth last quarter earnings jumped 32% while
revenue grew 21% and analysts expect the double-digit earnings growth to continue
in 2020 from an ESG standpoint the medical device company has improved its
quality controls and in turn it’s seen a decline in product recalls with only
four and 2018 down from 14 in 2015 okay when we come back we’re discussing
a ESG issues for investors and what companies are doing to address them back
in a minute this season on cultural capital we are
in New York City and San Francisco come with me as I tour some of the world’s
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learn how CEOs built new growing companies while maintaining the ultimate
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calm welcome back everyone and joining us now
to talk more about key ESG issues for investors and what companies are doing
to address those concerns is Elena Basova she’s a Senior Analyst on NASDAQ
Strategic Capital Intelligence team thanks so much for being here Elena
thank you all right so from Nasdaq’s perspective can you give us a bit of an
assessment of the ESG landscape because this is something that is popping up
more and more on investors radars yes so what we’ve been seeing is there’s an
evolution off the balance sheet what that means is that Corpuz intangibles
have been growing pretty rapidly intangibles such as brand value customer
loyalty intellectual capital and these intangibles are very hard to quantify so
investors inevitably forced to go and look for alternative ways of developing
and you know understanding their research and use the framework has been
able to provide quite a few good insights on that front so far okay and
so then from an investor perspective what are some of the ESG factors that
are of most concern because at the end of the day I think investors what they
really want is performance exactly so investors goal is to generate alpha so
first of all they would care about those metrics that would be overlooked within
the conventional financial analysis and then those that would be considered
financial and material what that means is that those metrics would have impact
on the long-term financial viability and operating performance of a company so
for example within the farmers face you know product quality and innovation and
safety will be considered much more financial material than supply chain
management okay and then when we’re talking about you know e s and G so
clear there’s there’s a lot that I think is kind of packaged into that yeah so
and and I think it’s also nice like maybe it’s a nice cherry on top that you
know if the company is doing something good for the environment but how that’s
actually impacting the company and its long-term health seems like it’s it’s a
pretty key thing to look at yes exactly and you know first of all there’s been a
ton of research done year-to-date and over the past few years that shows that
there is a strong correlation between who used your
and long-term financial performance and operating performance of a company in
addition to that we’ve been advising companies to really you know see how the
core peers are doing and you know try to understand why their rings maybe it may
not be on par with their core peers and also try and understand you know what
they’re you know look at the opportunity cost and try and understand how many
resources how much money and time they can realistically allocate to the ESG
efforts and once that’s done our developer strategies are implementing it
okay so when companies are looking at their position in the ESG landscape how
how is it that they can really move ahead in their their peer groups it
looks like it might take effort if you’re if you’re falling behind exactly
it would be very unfortunate because they would you know immediately get
knocked out of a lot of investors screens if they’re not performing in
terms of is she but performing on on all the other levels in terms of the
financials and business metrics so we would say transparency is very important
really you know reporting year around not just when agencies reach out with
their surveys but having a person or a team in place on staff that deals with
it throughout the year so I think that’s one of the important points to note here
and then what else should they really be doing to take solid steps towards
improving perhaps not only their ranking but maybe perhaps investor perception I
think trying to get into one of the major indices such as Dow Jones
Sustainability Index would create amazing visibility you know there’s been
some talks about even easy or it it’s not really viable yet but starting to
think about that is also one of the really good options okay so and then
when you’re saying ESG audit it’s you know I guess maybe looking beyond the
numbers or the data that’s reported but really exactly taking a fuller look at
what’s happening kind of like accounting audit but within the ESG space we think
that’s you know the next step for the sorta we had it okay
well we’ll definitely keep an eye on this trend thanks so much for your
insights today thank you alright and thanks everyone for watching Investing
Strategies next week it’s a cyber monday special
that means we’ll be analyzing the holiday shopping scene and taking stock
of retail and e-commerce winners and losers plus we’ll be taking a look at an
ETF that’s tracking internet enables innovation until next time I’m Alissa Coram Thank you

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