NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, December 16, 2016

Pfizer stock was riding high in June 2015, up 128 percent in five years, making it the second-most valuable American drug maker. Nine out of 10 Wall Street research analysts recommended that investors hold it in their portfolio, if not buy more.

That same month, however, a different type of research firm downgraded Pfizer to its lowest rating, reflecting what it considered increased risks from factors that other Wall Street analysts typically ignore: environmental, social and corporate governance issues, or E.S.G.

Investing based on so-called E.S.G. factors has mushroomed in recent years, driven in part by big pension funds and European money managers that are trying new ways to evaluate potential investments. The idea has changed over the last three decades from managers’ simple exclusion from their portfolios of “sin stocks” such as tobacco, alcohol and firearms makers to incorporation of E.S.G. analysis into their stock and bond picks.

Sometimes, E.S.G. can be a warning flag for stock-market darlings “with aggressive consumer or product safety practices that may be skating too close to the edge,” said Linda-Eling Lee, global research chief for MSCI’s E.S.G. ratings. For example, MSCI downgraded Volkswagen two notches to its third-lowest rating in 2013 — two years before an emissions-test cheating scandal — in part because of “poor levels of director  interdependence.”