Investing based on so-called E.S.G. factors has mushroomed in recent years, driven in part by big pension funds and European money managers that are trying new ways to evaluate potential investments. The idea has changed over the last three decades from managers’ simple exclusion from their portfolios of “sin stocks” such as tobacco, alcohol and firearms makers to incorporation of E.S.G. analysis into their stock and bond picks.
Sometimes, E.S.G. can be a warning flag for stock-market darlings “with aggressive consumer or product safety practices that may be skating too close to the edge,” said Linda-Eling Lee, global research chief for MSCI’s E.S.G. ratings. For example, MSCI downgraded Volkswagen two notches to its third-lowest rating in 2013 — two years before an emissions-test cheating scandal — in part because of “poor levels of director independence.”
MSCI is perhaps better known for its global stock indexes, but its annual E.S.G. index and research revenues have been growing at 20 percent annually and should top $44 million this year, making the segment the firm’s fastest-growing business.