Scientific Beta disagrees with MSCI on the exclusion of controversial weapons
In a letter in response to Swiss Sustainable Finance’s open letter of January 31, 2019, Professor Noël Amenc, CEO of Scientific Beta, the smart beta index provider set up by EDHEC Business School, considers that MSCI’s arguments, in response to the request from the investors and asset managers who co-signed the letter to exclude controversial weapons from global cap-weighted indices, are not admissible. Indeed, there are no practical or academic grounds for the idea that a broad cap-weighted index representing all investment opportunities cannot as a result contain an ESG filter by default.
From a practical point of view, we know that the exclusions on controversial weapons proposed by Swiss Sustainable Finance represent a very marginal weight that in any event is far lower than the exclusions or weight limitations implemented by all index providers to guarantee the liquidity and investability of their global cap-weighted indices.
In addition, as a venture by an academic institution, Scientific Beta clearly affirms that the argument that would have one believe that the cap-weighted index is the representation of the theoretical true market portfolio has no scientific credibility. We know that the cap-weighted index is ultimately an index like any other that has the particular virtue of providing the weighted average performance of the market. Excluding stocks that represent controversial weapons would not affect this average significantly.
Scientific Beta considers that promoting an opt-in option that corresponds to a paid service falls short of what is at stake with this exclusion from an ethical and humanitarian standpoint.
Ultimately, for Noël Amenc, MSCI’s response is representative of the attitude of a large share of the players in the index industry who consider that ESG is a good business opportunity rather than an opportunity to do good. Index providers too often perceive ESG as a driver of profits by increasing the number of costly options for access to data.
Scientific Beta, which does not provide broad cap-weighted index series, cannot respond directly to the request from Swiss Sustainable Finance and the 155 (as of February 18, 2019) investors and asset managers who have co-signed the letter of January 31, 2019. Like them, Scientific Beta is restricted by the failure of the major index providers to take a decision in this area. From June 2019, however, Scientific Beta commits to offering all its clients an ESG option on its smart beta index series, at no additional cost, that will provide for a minimal exclusion representing fewer than 5% of the stocks in the global universe, without pre-empting a more active exclusion policy.
Apart from the exclusion of controversial weapons, this exclusion also takes into account tobacco, the coal industry and coal-based resources, companies that openly violate ethical standards and companies that do not guarantee equal voting rights to shareholders without compensation.
In a concern to generalise this filter, Scientific Beta will also undertake a consultation of all its clients that aims to be able to consider these exclusions as the default choice (with an opt-out approach) and no longer as an opt-in option to be exercised by the investor, as proposed by other index providers.
The letter sent by Scientific Beta to the president of Swiss Sustainable Finance can be accessed by clicking here.
About Scientific Beta
As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up Scientific Beta. Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
Find out more by following Scientific Beta on Twitter ( https://twitter.com/ScientificBeta ), LinkedIn ( https://www.linkedin.com/company/scientific-beta ) and YouTube ( https://www.youtube.com/channel/UCRL91F-LvhLPc9M9OD7LQgA).