In recent years, the popularity of, and demand for, ESG funds has increased due to a combination of ethical concerns and the additional risk mitigating benefits attached to taking ESG factors into consideration.
In fact, many have said that failing to consider the risk posed by poor environmental, social, and governance practices could lead to losses, both for clients and for financial advisors. Multi-asset portfolios with integrated ESG stocks are an easy way to make sure client portfolios are as diverse as possible with manageable investment risk and reduced portfolio volatility.
Not only are ESG factors an excellent way to assess risk, ESG funds have been shown to perform just as well as conventional ETFs for the same risk. Last month, ESG funds had risen to $3.4bn – nearly 45% over the previous 18 months, with assets in ESG funds linked to MSCI indexes growing by 50% over 2015. The trend shows no sign of slowing down, with the majority of institutional investors taking ESG risk factors into account when making investment decisions.
Last month, Morgan Stanley announced that they would be introducing two new ESG multi-asset funds, mirroring the strategy of their current Global Balanced Risk Control fund, which they believe is the best way to participate in rising markets while still providing strong downside protection. These new funds – the Global Balanced Fund and the Global Balanced Defensive Fund – are the first at Morgan Stanley to incorporate ESG factors into the process and promise to both improve returns and enhance risk management at the same time, an important consideration particularly amidst the post-Brexit uncertainty which still reigns.
In response to this growing popularity, MSCI has introduced a new suite of fund metrics, scores and rankings on FactSet to help institutional investors and wealth managers better judge the ESG characteristics of their portfolios. FactSet, which provides integrated financial information and analytical applications, will now offer a new level of transparency on the ESG quality of over 23,000 mutual and exchange-traded funds. These will be ranked or screened based on their sustainable impact, their values alignment and any other ESG risk, such as their carbon footprint, making it even easier for managers and financial advisors to respond to a client’s interest in sustainability.
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