Index provider MSCI intends to add staff in Asia to improve its coverage of companies’ environmental, social and governance (ESG) commitments in the region as part of a broader effort to ramp up the firm’s revenues there to rival those it earns from the US and Europe.
During a wide-ranging conversation with AsianInvestor, MSCI chief executive Henry Fernandez said the firm saw ESG capabilities as a key area of business opportunity in the region.
“We are beginning to see meaningful ESG investing from Japan,” he said. He pointed to the plan by Japan’s Government Pension Investment Fund (GPIF) to allocate ¥1 trillion ($9 billion) to three ESG indexes, two of which are provided by MSCI, and its intention to go into ESG smart-beta strategies later this year.
The index firm is having numerous conversations on this topic with big clients in the region, Fernandez said. “What we have not yet seen is either the local asset management community embrace ESG; we've not seen a lot of products [from them] or [large parts of] the foreign asset management community. I think that is going to change.”
Certainly, AsianInvestor has been hearing a lot about sustainable investing from international asset managers in recent months.
Moreover, in addition to GPIF, other institutional investors are making pioneering moves in this space, such as New Zealand Superannuation Fund and Australia's Local Government Super and Australian Ethical, as reported. They are all aiming to invest in a more carbon-friendly manner.
Fernandez is a long-standing Asiaphile, first visiting the region for a month in 1979 as a graduate student, when he travelled mostly around south China during the early reform efforts by the Communist Party’s ‘paramount leader’ Deng Xiaoping.
He believes MSCI can gain much more business traction in Asia. The region accounts for almost half of the firm’s 3,000 staff but only 15% of its revenues, said Fernandez. He would like to see MSCI’s business in Asia rival the size of that in Europe or the US, but concedes this won’t happen within a year.
But ESG is core to this ambition, noted Fernandez, with about a tenth of the company’s staff dedicated to this area, which generated $70 million in annual revenues from a total of $1.2 billion in 2016.
However, it’s growing by at least 30% a year, he said, and the intention is for it to contribute 10% of the revenue base in the future.
To this end, MSCI is looking to build up its regional ESG capabilities further. In July the company hired Mervyn Tang from Fitch as its head of Asia-Pacific ESG research on data. Based in Hong Kong, he replaced Emily Chew, who left to join Manulife Asset Management in October 2016.
Tang is likely to get more resources soon as MSCI beefs up its ESG research and client coverage, said Fernandez.
The Asia operation could gain a handful of new researchers and salespeople over the coming year to help support these efforts, he noted. Asset owners – particularly sovereign wealth funds and pension funds – represent the fastest growing client segment, he added, “but we are also excited by Asian asset managers”.
MSCI rates 8,300 companies on their ESG commitments, of which 6,200 are publicly listed, said Fernandez. The aim is to increase that to 8,500, the number of stocks in the MSCI All Country World Index.
The addition will include coverage of the China A-share stocks that MSCI agreed to add to its EM index in June. While 70 to 80 of these companies were already covered due to being listed in other exchanges, many are only listed locally. MSCI will work over the next year to strengthen its understanding and ESG research on these companies, Fernandez said.
Look out for the second part of this series in the coming days, which will explore what it may take for ESG investing to really gain traction in Asia.