MSCI has published new research highlighting how environmental, social and governance (ESG) characteristics affect corporations' valuations and risk profiles.
Systematic risk
Finally, the "valuation channel", which analyses how firms' ESG rating affects their exposure to systematic risk, argues firms with a strong ESG profile are less susceptible to systematic market shocks.
The report gave the example of energy-efficient companies that are less vulnerable to changes in energy prices than less efficient peers.
By avoiding systematic risks, the report said investors in the firm would require a lower rate of return, which would ultimately translate into a lower cost of capital and therefore a higher valuation.
MSCI launches four ESG factor indices
In addition, Giese said: "While the impact of ESG ratings on a company's investor base is fairly difficult to measure in practice, it can be a key motivation for large asset owners to integrate ESG in their portfolios."
The report referenced a comment from SwissRe, who shifted their entire $130bn portfolio to ESG benchmarks.
The firm said: "A shift to ESG benchmarks would lead to a smaller investment universe and hence lower demand for the excluded securities.
"Over the long term, we expect that such movements will motivate these companies to further include ESG aspects into their business approach and extend their ESG-related disclosure.
"Due to the improved resilience to long-term risks, this is beneficial for investors as well as for the company itself. Consequently, ESG factors will have an impact on company valuation and cost of capital, and as such become an integral part of financial analysis."
Over the past ten years, the MSCI SRI index has generated annualised returns of 5.95% versus 5.63% for the MSCI World, as at 29 December 2017.
MSCI has $85bn benchmarked against its suite of 700 equity and fixed income ESG indices, as of June 2017.
ESG trends for 2018
Heading into the new year, MSCI highlighted its five ESG trends to watch in 2018.
The firm predicted more clients would look to apply ESG to their fixed income portfolios, while using ESG signals to help navigate the emerging markets investment universe.
Furthermore, MSCI said it would begin expanding its view of portfolio climate risk from company carbon footprint to macro exposures across asset classes, and would look to alternative data sources to balance "the growing volume of corporate sustainability disclosure".
Finally, the report said it would be the ‘year of the human', as companies with better human capital practices tend to have stronger productivity growth than peers.
