Sustainable investments – from niche to mainstream

Niche, mainstream, supertrend – sustainable investment is on everyone’s lips these days. The number of available ESG funds1 has grown exponentially, especially in the last three years. Providers that do not yet have ESG investments on offer are increasingly operating at a competitive disadvantage. Credit Suisse Index Solutions was one of the first providers to launch a whole range of sustainable index funds.

For many investors, the question is no longer whether, but how best to invest in ESG funds – and there are almost as many opinions on this as there are investors. However, some requirements are common to all investors: ESG index funds should not deviate too much from the parent index, should have a similar risk profile, and should offer a return at least as good as the standard index. Credit Suisse Index Solutions has always been committed to these requirements, and relies on the ESG Leaders approach from MSCI.

Companies that consider environmental, social and long-term business aspects in their operations often achieve better results than the wider market. This is hardly surprising, since they have a more advantageous risk profile than controversial companies due to their responsible use of a wide variety of resources. As a consequence, they often perform better on the stock market. This was not always the case. In the past, mainly quarterly sales and profit figures were rewarded. Many investors would have fully agreed with the argument, that the inclusion of ESG criteria reduces returns. However, extensive studies have shown that sustainable investment strategies often outperform traditional products in terms of return and are many times less risky in the event of market corrections. The current generation of investors has therefore recognized the potential of sustainable investments. The number of ESG-based funds and their assets have increased sharply, especially in the last three years.

Credit Suisse Index Solutions offers a whole range of sustainable index funds that cover a broad spectrum of ESG investments. The ESG Leaders indices from MSCI serve as a basis for our products. According to our evaluations, these best meet investors’ requirements in terms of risk/return profile and tracking error against the parent index, while consistently applying ESG criteria.

MSCI as a leading provider of ESG data

With a team of over 200 analysts who continuously evaluate more than 7,500 companies, MSCI has developed a transparent, objective and quantitative evaluation model that reflects the sustainability profile of companies as accurately as possible. The MSCI ESG Leaders indices are compiled on the basis of this high-quality data. These broadly diversified indices cover a large number of regions and have a comparable risk/return profile to their respective parent index. This is mainly due to a best-in-class index methodology that leaves industry weightings unchanged. Only securities that have successfully undergone a multi-stage selection process are included in the MSCI sustainability indices:

  • In a first step, companies with significant income from controversial activities or business practices (e.g. arms trading) are systematically excluded.
  • The remaining companies are subject to a detailed analysis based on publicly available data. This analysis finally results in the MSCI ESG rating.
  • The top 50% of companies that received the ESG rating are then included in the ESG Leaders Index. To avoid sector distortions, this evaluation is conducted separately for each sector. This reduces the tracking error against the underlying parent index.

A comparison of the performance of ESG Leaders indices against their parent indices shows that almost all ESG indices have historically outperformed the parent index. In Emerging Markets in particular, there is a much better performance.

One exception is the United States, which is the only region in the MSCI World ESG Index not to outperform its non-ESG equivalent. This is mainly due to large technology companies such as Facebook and to the weapon industry. They are classified as unsustainable by MSCI but have an above-average historical performance.

Return: MSCI Emerging Markets ESG Leaders Index versus MSCI Emerging Markets Index

It is not possible to invest in an index. The index returns shown are not the results of actual trading in investable assets/securities. Investors that pursue a strategy similar to an index may achieve lower or higher returns and must take the associated costs into account.

In contrast to the slight underperformance of the MSCI World ESG Index in the past, the MSCI All Country World ESG Index (the current combination of 12% MSCI Emerging Markets ESG Index and 88% MSCI World ESG Index2 as of the end of November 2019) has narrowly outperformed the benchmark index, partly due to the effects mentioned above.

Return: MSCI All Country World ESG Leaders Index versus MSCI All Country World Index

In addition to comparing ESG indices with their traditional counterparts, many studies3 have been able to demonstrate the positive correlation between a company’s sustainability orientation and its financial performance. Credit Suisse therefore has a long tradition of aligning various investment strategies with sustainability. Back at the turn of the millennium, Credit Suisse was one of the first companies to sign the UN Global Compact, the world’s largest agreement on responsible corporate governance. Since then, the product range of sustainable funds and index funds has been steadily expanded. Assets invested in ESG index funds by Credit Suisse Index Solutions have now grown to over CHF 4 bn.

We expect demand for ESG based index funds and green bonds to remain strong in the future and will therefore continue to expand our product range. Our clients always benefit from the same management fee as for our standard products.

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