MSCI unveils slew of fixed income ESG and factor indexes

14 Jan 2020

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Elena Johansson

MSCI has announced the launch of a series of 15 fixed income indexes to help institutional investors navigate market risk and return and support the transparency of fixed income strategies.

Peter Zangari, global head of research and product development at MSCI, explained: “Our fixed income solutions help investors assess and manage opportunity and risk, while responding to demand for improved transparency and operational efficiency.”

ESG Clarity‘s sister title Expert Investor reached out to MSCI to get details of how the solutions help investors, but no reply was received ahead of publication.

The series includes one issuance weighted, two environmental, social and governance (ESG) and 12 factor indexes.

Exclude the weak

The MSCI USD IG ESG Universal Corporate Bond Index is constructed with the same methodology used for the MSCI Fixed Income ESG Universal Indexes.

This entails:

The stocks with the weakest ESG profile from the MSCI Corporate Bond Indexes (the parent index) are excluded;
The ESG re-weighting factor is defined by assessing both the current ESG profile (based on the current MSCI ESG Rating) as well as the trend of that profile (based on the MSCI ESG Rating Trend); and,
The securities are re-weighted based on the free-float market cap weights of the parent index, and using the combined ESG score.

In a mock portfolio, the dollar-denominated index performed 5.76% in annualised return over three years and 13.92% year-to-date, as of end of November 2019.

This is only slightly less than its non-ESG variant, the MSCI USD IG Corporate Bond, which performed 5.8% in annualised return over three years and 13.96% year-to-date.

No alcohol, gambling or nuclear power

The MSCI USD IG ESG Leaders Corporate Bond Index is constructed with the same methodology used for the MSCI Fixed Income ESG Leaders Indexes.

This entails:

Companies are selected using a best-in-class selection process;
The constituents are selected from the universe of the MSCI Corporate Bond Indexes (the parent index);
Companies with weak ESG profile, or those involved in alcohol, gambling, tobacco, nuclear power and controversial weapons, are excluded from the selection universe; and,
Post exclusions, issuers with the strongest ESG profiles are ranked and selected.

The selection process targets to achieve 50% of the market value in each sector of the parent index. The index is market-value weighted.

In a mock portfolio, the dollar-denominated index performed 5.82% in annualised return over three years and 13.56% year-to-date, as of end of November 2019.

Its parent index produced a similar performance, with 5.8% in annualised return over three years, but outperformed with 13.96% year-to-date.

Other new MSCI fixed income indexes and factor indexes are:

Issuance Weighted