ESG Investment Finds its Footing

Assets allocated to ESG investments have boomed in recent years. While some may fear that accelerating allocations could lead to frothy valuations, research so far suggests this is mostly unwarranted. In 2021, we see both hype and skepticism about ESG giving way to acceptance and a more nuanced understanding of when and how ESG has shown pecuniary benefits — and when it hasn’t.

Decomposition of Returns by ESG Rating

ESG investing is not just another stock bubble. Below we see how the top third (T3), middle third (T2), and bottom third (T1) of companies in the MSCI ACWI Index by MSCI ESG Ratings performed over a seven-year period. We found that the top third outperformed their peers due to higher earnings growth at the higher-rated companies, followed by the higher reinvestment return from dividend payouts and share buybacks.

Source: MSCI ESG Research. Data from May 31, 2013 to May 31, 2020.

² The second quarter saw investors pull $137 billion, overall, out of stock funds. However, ESG investors directed $9.3 billion into stock funds.”: Elliott. A. “As ESG Investing Gives 2020 A Sustainable Spin, 50 Best ESG Companies Revealed”. Investor’s Business Daily, October 26, 2020.; Darbyshire, M. “ESG funds continue to outperform wider market.” Financial Times, April 3, 2020.

³ Johnson. S. “Better stock selection boosted ESG funds, research suggests.” Financial Times, October 14, 2020.

⁴ Dillian. J. “ESG Investing Looks Like Just Another Stock Bubble”. Bloomberg.com, October 5, 2020.