The smart beta index provider, Scientific Beta has disagreed with the recent announcement from MSCI to exclude controversial weapons from global cap-weighted indices.
According to Scientific Beta’s chief executive, Noel Amenc, there were no practical or academic grounds for the idea that a broad cap-weighted index representing all investment opportunities could not as a result contain an environmental, social and governance (ESG) filter by default.
Amenc also said, in response to Swiss Sustainable Finance’s open letter: “From a practical point of view, we know that the exclusions on controversial weapons proposed by Swiss Sustainable Finance represent a very marginal weight that in any event is far lower than the exclusions or weight limitations implemented by all index providers to guarantee the liquidity and investibility of their global cap-weighted indices.”
The firm said it believed that the cap-weighted index was the representation of the theoretical true market portfolio has no scientific credibility.
“We know that the cap-weighted index is ultimately an index like any other that has the particular virtue of providing the weighted average performance of the market, “he said.
“Excluding stocks that represent controversial weapons would not affect this average significantly.”
Scientific Beta, which does not provide broad cap-weighted index series, believed that promoting an opt-in option that corresponded to a paid service falls short of what is at stake with this exclusion from an ethical and humanitarian standpoint.
It admitted it was restricted by the failure of the major index providers to take a decision in this area. However, from June 2019, Scientific Beta committed to offering all its clients an ESG option on its smart beta index series, at no additional cost, that would provide for a minimal exclusion representing fewer than five per cent of the stocks in the global universe, without pre-empting a more active exclusion policy.