ESG Ratings and Financial Performance: Research Overview
The inclusion of ESG Ratings into the investment process has evolved over time. For example, some investment managers actively pursue strategies that exclude stocks with lower ESG Ratings while others focus on only selecting stocks with higher ESG Ratings. While there is a robust set of sustainability data and metrics to analyze portfolios, many investors want to know how incorporating ESG Ratings into their investment strategies is contributing to overall portfolio risk and return.
MSCI has performed extensive research to assess the risk and performance characteristics of MSCI ESG Ratings and MSCI ESG Indexes — You can find the details in the research papers listed below each section.
At a high level, our research looked at stock and fundamental (earnings) performance, systematic risks and idiosyncratic risks. Here, we answer some commonly asked questions, presenting key findings and links to the full blog posts or reports for greater detail.
ESG Ratings and Financial Performance
In the ever-evolving landscape of investing, ESG Ratings have been criticized both for being too focused on ethical considerations and not focused enough on these issues. The true goal of MSCI’s ESG Rating methodology is to provide investors with a tool for assessing corporate risks as they work to build better portfolios.
MSCI ESG Ratings, research and data are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG and Climate Indexes are products of MSCI Inc. that utilize information from MSCI ESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK).
Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results.
The content of this web page is research for informational purposes only and is intended for institutional professionals with the analytical resources and tools necessary to interpret any performance information. Nothing herein is intended to promote or recommend any product, tool or service.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. The chart shows the cumulative performance of MSCI ESG factor (defined as the z-score of MSCI ESG Industry-adjusted ESG score) in the MSCI Global Equity Factor Model + ESG (GEMLTESG) model.
https://www.msci.com/www/blog-posts/factoring-in-esg/02343304664
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by Global Industry Classification Standard (GICS®) sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The next month’ performance (in local return) of the quintiles is calculated. The graph shows the cumulative difference between the top and bottom quintiles’ performance.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The average value of the fundamental data, shown in a z-score format, by quintile is calculated every month, and the distribution of the monthly averages is plotted in the boxplots.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The maximum drawdowns over the next rolling 36 monthly are calculated for each stock. The number of drawdowns larger than 95% are counted and plotted for quintile 1 and 5.
Source: MSCI. Data from 31 December 2012 till 31 May 2023.
Source: MSCI. Data from 31 December 2012 till 31 May 2023 (except for WACC where data starts on 31 August 2015). Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The average value of the fundamental data, shown in a z-score format, by quintile is calculated every month, and the distribution of the monthly averages is plotted in the boxplots.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Relative performance versus MSCI ACWI. MSCI ACWI ESG Universal has life track record since 28 Feb 2017; MSCI ACWI ESG Focus since 30 Jun 2018. MSCI ACWI ESG Leaders since 30 June 2013. MSCI ACWI SRI since 31 Mar 2014. Ratio of index levels relative to MSCI ACWI index level, rebased to 100 on 31 Dec 2012.