Countdown to launch of new ASX indexes for ESG boom

The ASX share market looks set to gain yet another new tranche of indexes in 2021.

Until now, ASX exchange-traded funds (ETFs) that track the Australian share market follow a very narrow range of ASX-based indexes. These mostly revolve around the flagship S&P/ASX 200 Index (ASX: XJO). However, there are other less-used indexes, such as the S&P/ASX 300 Index (ASX: XKO).

But as you might have noticed, most of these ‘ASX-only’ indexes are run by S&P Global Inc (NYSE: SPGI).

But today, we have news that another global index provider in MSCI is set to join the party.

Who’s this?

MSCI (formerly Morgan Stanley Captial International) is a New York-based company known for its globe-spanning indexes. Although MSCI currently does not offer ETFs, ASX investors might be familiar with some ASX ETFs that already track MSCI indexes around the world.

These include the Vanguard MSCI Index International Shares ETF (ASX: VGS), the iShares MSCI South Korea ETF (ASX: IKO) and the iShares MSCI Emerging Markets ETF (ASX: IEM).

But in Australia, MSCI is moving from the backroom to the open in offering its own indexes that exclusively track ASX shares. The Australian Financial Review (AFR) reported today that MSCI is launching more than 50 Australian indexes this week. According to the report, MSCI has been “quietly” working with super funds, ETF providers and fund managers over the last few months on the new offerings.

The new indexes will be grouped into four areas: market capitalisation, factor, thematic, and ESG (environmental, social and governance).

The market cap indexes will group ASX shares based on size (eg large-cap, small-cap), while the factor indexes will revolve around labels like value, quality or momentum.

Thematic indexes will cover specific sectors or areas of interest, such as real estate or resources. The ESG offerings will include a universal ESG index and others based on factors like climate change and excluding fossil fuels.

ASX is the pick of the bunch

The AFR reports that Australia is one of only 2 markets that MSCI has chosen to build a portfolio of domestic indexes. That’s due to 2 reasons.

Firstly, the large capital base that our unique superannuation system provides. With at least 9.5% of the country’s pre-tax income going into the superannuation system every year, there is a wide capital base to work off and a long runway for growth. Clearly, MSCI has noticed and is banking on super funds offering investments that may track MSCI’s indexes in the future.

Secondly, the shift towards ESG investing in Australia. That AFR report states there is “a hunger for index-based strategies that can better replicate their investment philosophies”. That spills over into which super products and investments Australians might choose to direct their super into.

MSCI clearly sees an opportunity here as the report states that the company wants to “work with each fund to create custom indexes that can reflect the fund’s ESG view”.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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