Gabriela Herculano, manager of iClima Smart Energy UCITS ETF (DGEN), comments on the decision of MSCI to exclude Russian equities from its emerging market indices and why ESG investors might want to take heed
“The decision of MSCI to pull Russian equities from its indices is a welcome one. Investors using ESG-screened indices may assume they are unaffected by this, based on the assumption that Russia’s energy intensive companies would have little representation in an ESG index – that assumption, however, is wrong. It will come as a surprise to many that the MSCI Emerging Markets ESG Leaders Index had, at the end of January 2021, a weighting of 1.2% to Gazprom, the Russian oil giant, making it a top 10 holding. Many will be scratching their heads as to why the MSCI ESG methodology would result in Gazprom being a top ten holding in an ESG index. More shockingly, however, Gazprom was actually an overweight position in the MSCI Emerging Markets ESG Leaders Index. As the index’s factsheet shows, Gazprom was 1.2% of the MSCI Emerging Markets ESG Leaders Index and 0.66% of the “parent index” i.e. the MSCI Emerging Markets Index. This should serve as a timely reminder to investors the potential pitfalls of only using ESG screens.”
