Monday, March 1, 2010

ESG: focus on reducing risk, not adding return

Today’s purchase of RiskMetrics by MSCI marks the ascendance of SRI as a tool to identify risk, rather than one that adds alpha to portfolios. MSCI Inc. is a leading provider of investment decision support tools to investment institutions worldwide. The company’s flagship products are the MSCI International Equity Indices, which include over 120,000 indices calculated daily across more than 70 countries, and the Barra risk models and portfolio analytics, which cover 58 equity and 49 fixed income markets. RiskMetrics is a leading provider of risk management and corporate governance products and services to the global financial community. Following their purchase of ISS in 2007, they have become well known to the SRI community after snapping up Innovest and most recently KLD.

In a conference call this morning, Ethan Berman of RiskMetrics said “the need to understand risk as part of the investment process is critical” and that the two companies will combine their risk management capabilities to provide a ‘unified language of risk’.

SRI got it’s moment in the sun when Henry Fernandez, Chairman and CEO (isn’t that a governance faux pas?) of MSCI discussed one of the reasons the two companies complement each other. “One clear example of that kind of revenue synergy comes in the environmental, social and governance space that RiskMetrics has been expanding on. We’re excited about the potential to leverage the research, the analytics and the data of RiskMetric’s ESG business to create global indices that will enable us to offer benchmark products for global socially conscious investors. That’s just one example of the synergies that we can generate with this combination.”

However, the idea of improving corporate performance through shareholder action doesn’t suit this model. Asked how ISS and the governance business fits into the new company, Mr. Fernandez answered “The core businesses that we want to build in this combined company are equity performance indices, equity portfolio management tools, fixed income portfolio management tools and the risk management tools. When you look at the ISS business in the context of that, it obviously becomes less core, less mainstream to us.”

Significant consolidation has occurred in the SRI industry over the past few years, and clearly new opportunities are now presenting themselves for our entrepreneurs.

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