Dropped from MSCI? Tap your ESG back-up

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??This week: Could good ESG performance be supportive of stock prices after an index break-up?

Singapore’s stock market stumbled on Wednesday (May 15) after index provider MSCI announced it was dropping five counters from the MSCI Singapore Index.

The five comprised property developer City Developments (CDL); auto distribution conglomerate Jardine Cycle & Carriage (C&C); logistics real estate investment trust (Reit) Mapletree Logistics Trust; commercial Reit Mapletree Pan Asia Commercial Trust; and offshore and marine engineering group Seatrium.

The share prices for all five fell on Wednesday. Seatrium dropped 11.7 per cent, Jardine C&C lost 4.3 per cent, and CDL shed 2.2 per cent. Mapletree Logistics took a 3.7 per cent hit, and Mapletree Pan Asia retreated 1.6 per cent.

MSCI’s decision to drop the stocks from the equity index, which feeds into global indices such as the All-Country World Index, is driven mostly by stock market considerations, such as market value, free float, liquidity and so on.

Taken in that light, an ESG performance strong enough to get a company included on major ESG indices could be a hedge of sorts against index deletions for non-ESG reasons.

Take CDL, for instance. According to its latest sustainability report, CDL highlighted that it is also included in the Dow Jones Sustainability, FTSE4Good, STOXX ESG Leaders and iEdge SG ESG indices.

The amount of money tracking ESG indices is nowhere near the sums tied to an MSCI equity index, so getting booted from MSCI Singapore surely hurts. Having a number of other indices to lean on probably cushions the fall, though.

Exclusion from one index could potentially lead to deletions in other indices in the same index family, of course, so it’s important to be good enough to get onto a diverse-enough universe of indices.

The hedge might also carry some risks of its own. For example, CDL took a S$250 million three-year revolving sustainability-linked loan from DBS in 2019 that was tied to its inclusion on at least one leading global sustainability index. Getting kicked out of all the ESG indices would have rendered CDL ineligible for a discount on the loan interest.

It will take a more involved study to know with confidence whether inclusion on ESG indices provides any meaningful hedge against deletion from non-ESG stock indices, but it doesn’t seem that far-fetched. It’s a back-up, and you can never have too many of those. Joining an ESG index essentially gives different parts of the market different ways to love your company. It’s like being on five different dating apps at the same time!

??Top ESG reads:

1. Climate Impact X, the Temasek and Singapore Exchange-backed carbon exchange, will launch a market intelligence service aimed at “lifting the veil” on an opaque market.
2. Singapore needs to increase investments into nuclear energy to develop a clean energy source and support its future industrial economy, says the chief of the Centre for Strategic Energy and Resources.
3. More than 180 private market funds are raising and deploying capital into the energy transition, says private markets specialist StepStone Group.
4. Scientists at the World Weather Attribution group say climate change exacerbated the April heat wave.
5. ESG introduces complex measurement systems that distract companies from their core businesses, argues Bloomberg’s Adrian Wooldridge.

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