The first emerging markets custom index which integrates Environmental, Social and, uniquely, Governance (ESG) screens has been announced by Northern Trust (Nasdaq: NTRS), in collaboration with MSCI ESG Research’s and Institutional Shareholder Services’ (ISS) ESG screens. A pooled fund passively managed to this new index has also been launched.
The MSCI Emerging Markets Custom ESG Index and Northern Trust's corresponding fund are designed to enable institutional investors across the globe to gain exposure to the potential growth and diversification benefits of emerging markets investment, while incorporating traditional environmental and social screening, as well as a unique governance screen.
“We see an increasing demand for exposure to emerging markets, particularly among our institutional investor clients,” said John Krieg managing director for Northern Trust’s asset management arm in Europe, Middle East and Africa. “While many government or majority family owned and run companies are very well managed, some investors are concerned that certain emerging market companies lack sufficient executive independence and scrutiny of management. This challenge led us to examine how we could develop a passive investment vehicle that could filter out companies with less satisfactory governance criteria, while still enabling access to emerging markets.”
The index was developed by Northern Trust in conjunction with MSCI ESG Research and ISS - a leading provider of corporate governance solutions The process comprises four steps: three screens are applied to the MSCI EM Index universe, followed by a sequence of checks on governance and executive independence.
The first three screens were determined based on common factors for norms based and industry screening criteria identified in consultation with Northern Trust’s existing European investor clients. The first eliminates constituent companies of the MSCI EM Index that have been found to be in breach of the UN Global Compact’s ten principles. The second screen removes manufacturers of controversial weapons such as cluster bombs and landmines and finally tobacco manufacturers are excluded.
Following these exclusions, any constituents lacking sufficient independence across ownership, board representation, key corporate committees and audit and remuneration committees are filtered out.
“This Index is unique in combining industry screens, norms-based screens and governance screens,” said Thomas Kuh, executive director, MSCI ESG Indices. “Research shows that good corporate governance matters and the addition of the governance screen should improve the quality of the companies in the index from an ESG perspective.”
According to a Northern Trust study, Changing Perspectives on Passive Investing, published in 2012, 44 percent of institutional investors incorporate ESG considerations within their investment planning. This supports research from the Global Sustainable Investment Alliance which indicates that 22 percent of assets globally invested currently incorporate ESG criteria. Meanwhile, allocation by institutional investors to emerging markets has increased by 30 percent in the last three years according to research by EIRIS.
“We believe there are three key drivers behind the growth in ESG considerations,” said Mamadou-Abou Sarr, senior product specialist for global index management at Northern Trust. “These include the obligation of asset owners to abide by their internal governance policies or the broader regulatory environment, and the growing recognition of the importance of ESG as an investment theme. The latest custom index and fund contribute to our existing ESG capabilities and address the challenge of combining ESG criteria with exposure to emerging markets.”
As of 31 December 2012, Northern Trust managed more than US$20 billion in socially screened assets for clients across the globe. It has over 20 years of experience managing socially responsible portfolios and socially-screened assets. In late 2012, Northern Trust announced it had launched the World Custom ESG Equity Index Fund which enables institutional investors across the globe to meet commonly held ESG criteria.
To read more about emerging markets and ESG Investing, read our white paper here.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 16 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2012, Northern Trust had assets under custody of US$4.8 trillion, and assets under investment management of US$758.9 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A, incorporated with limited liability in the U.S.
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