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.