How does the fund select for better ESG companies?
Step 1: MSCI start with their World Index and eliminate companies with a low Controversy Score, an assessment that identifies companies involved in very serious controversies involving the environmental, social, or governance impact of their operations and/or products and services. Controversy Score falls on a 0-10 scale, with “0” being the most severe controversy. MSCI also excludes companies involved in controversial business activities including alcohol, gambling, tobacco, nuclear power, conventional weapons and nuclear weapons.
Step 2: MSCI then assesses and scores the remaining companies within the World Index based on their ESG risks and opportunities relative to their industry peers. The three pillars of environmental, social and governance can be broken down into 10 themes, shown below. The assessment factors include criteria such as how companies respond to climate change, treat their workers and manage their supply chains.
Company scores are adjusted for each industry and then mapped to a letter rating, ranging from ‘AAA’ to ‘CCC’.
ESG Pillars and Themes
- Climate Change
- Natural Resources
- Pollution & Waste
- Environmental Opportunities
- Human Capital
- Product Liability
- Stakeholder Opposition
- Social Opportunities
- Corporate Governance
- Corporate Behaviour
Step 3: Companies are then ranked on their ESG rating, and the top 50% of companies (based on market capitalisation) in each industry and geographical region are selected for the MSCI ESG World Leaders Index.
Step 4: As the Old Mutual World ESG Index fund tracks the MSCI index, your money is then invested into these more socially responsible companies recognised for their high ESG score.