ESG Indexes Lifted by Carbon-Efficient Firms but Underperformed
- MSCI ACWI ESG Indexes outperformed on an annual basis for most years between 2013 and 2021 but underperformed during the first three quarters of 2022.
- While allocations to carbon-efficient companies within each sector contributed to performance, exclusions from the MSCI ACWI ESG Leaders Index due to ongoing ESG controversies detracted from performance.
- The third quarter was characterized by change of direction in the performance of industry factors, especially energy and aerospace and defense. This led to reducing the industry contribution of the MSCI ACWI ESG Indexes.
Historical ESG index performance
None | MSCI ACWI Index | MSCI ACWI ESG Screened Index | MSCI ACWI ESG Universal Index | MSCI ACWI ESG Leaders Index | MSCI ACWI ESG Focus Index | MSCI ACWI SRI Index |
Q3 | -6.8 | -7.0 | -7.3 | -8.3 | -7.4 | -7.2 |
YTD | -25.6 | -26.5 | -26.6 | -27.4 | -26.5 | -28.5 |
2021 | 19.0 | 19.2 | 20.5 | 21.3 | 18.8 | 24.5 |
2020 | 16.8 | 18.4 | 17.8 | 16.6 | 19.2 | 21.4 |
2019 | 27.3 | 27.8 | 28.7 | 27.9 | 28.2 | 29.2 |
2018 | -8.9 | -8.9 | -8.8 | -8.1 | -8.2 | -6.5 |
2017 | 24.6 | 24.8 | 24.8 | 23.8 | 25.2 | 25.4 |
2016 | 8.5 | 8.0 | 7.8 | 8.5 | 9.4 | 8.9 |
2015 | -1.8 | -1.1 | -1.2 | -1.7 | -1.0 | -2.2 |
2014 | 4.7 | 5.1 | 4.8 | 5.4 | 5.1 | 4.5 |
2013 | 23.4 | 24.3 | 25.5 | 25.1 | 24.2 | 24.6 |
Calendarized gross returns for the period ending Sept. 30, 2022. Returns are cumulative for periods shorter than the year. YTD returns are between Dec. 30, 2021, and Sept. 30, 2022. Q3 returns are between June 30, 2022, and Sept. 30, 2022.
Dollar strengthening and exclusions were detractors
Financial market volatility, interest rate hikes, geopolitical turmoil and a strong U.S. dollar dominated the headlines in the third quarter. This environment negatively impacted the five MSCI ACWI ESG Indexes during the quarter, as it did for the first half of the year, although the underlying performance drivers for each period were different.
The indexes currently have a small negative active U.S. allocation, and the recent period of dollar strengthening generated a negative currency contribution (as shown below). While allocations to the ESG factor didn't generate a positive contribution this quarter, the contribution from allocations to carbon-efficient companies within each sector was positive. But the negative contribution driven by stock-specific exclusions significantly contributed to underperformance.
Active factor-based performance attribution
Active factor-return attribution for MSCI ACWI ESG Indexes for the first half and the third quarter of 2022. Between Dec. 31, 2021, and June 30, 2022, for the first and second quarters. Between June 30, 2022, and Sept. 30, 2022, for third quarter.
The impact of exclusions
The specific-return contribution during this quarter was significantly negative for the MSCI ACWI ESG Indexes in the third quarter, and especially so for the MSCI ACWI ESG Leaders Index, which targets the most highly-rated ESG companies within each sector. The index also excludes companies due to their ongoing ESG controversies, which significantly contributed to its underperformance.
The four largest holdings of the MSCI ACWI Index (Apple Inc., Microsoft Corp., Amazon.com Inc. and Alphabet Inc.) accounted for more than 12% of the index by weight as of Sept. 30, 2022, and contributed more than half of the negative specific return of the MSCI ACWI ESG Leaders Index. 1Both Apple and Amazon were excluded from the MSCI ACWI ESG Indexes due to their involvement in ongoing controversies related to their customers, governance, the environment and human rights. Companies like Microsoft and Alphabet were MSCI ACWI ESG Leaders Index constituents during the second quarter, but continued to underperform and detract from performance in the third quarter.
Top four constituents, performance and inclusion
Asset Name | Constituent of MSCI ACWI ESG Leaders in Q3 | Average parent weight, Q3 | Average active weight in MSCI ACWI ESG Leaders, Q3 | Cumulative asset return Q3 | Cumulative specific return contribution MSCI ACWI ESG Leaders Q3 |
APPLE INC | No | 4.44% | -4.44% | 1.22% | -0.15% |
MICROSOFT CORP | Yes | 3.28% | 3.26% | -9.12% | -0.20% |
AMAZON.COM INC | No | 2.01% | -2.01% | 6.39% | -0.10% |
ALPHABET INC | Yes | 2.27% | 2.25% | -12.22% | -0.15% |
Data between June 30, 2022, to Sept. 30, 2022.
Industry allocation played a lesser role
In a divergence from the first two quarters of the year when industry factors had sizeable returns, we saw a reversal in performance in the third quarter, especially for energy and aerospace and defense.
The MSC ACWI ESG Indexes are constructed to avoid significant Global Industry Classification Standard (GICS®)2 sector exposures, which historically have led to insignificant active industry exposures. We saw earlier this year how substantial energy-sector returns of industries in the energy sector resulted in significant active return contributions, but this was not the case in the third quarter. We review the performance of MSCI Global Equity Factor Model industry factors and ESG exposures for the third quarter below.
Top and bottom industry factors performance and ESG exposure
Unnamed: 0 | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | Sign of average exposure Q3, 2022 | Sign of average exposure Q3, 2022.1 | Sign of average exposure Q3, 2022.2 | Sign of average exposure Q3, 2022.3 | Sign of average exposure Q3, 2022.4 |
|---|---|---|---|---|---|---|---|---|
Unnamed: 0 None | Unnamed: 1 Industry factors | Unnamed: 2 Performance Q3, 2022 | Unnamed: 3 Performance Q1 + Q2, 2022 | Sign of average exposure Q3, 2022 MSCI ACWI ESG SCREENED | Sign of average exposure Q3, 2022.1 MSCI ACWI ESG UNIVERSAL | Sign of average exposure Q3, 2022.2 MSCI ACWI ESG LEADERS | Sign of average exposure Q3, 2022.3 MSCI ACWI ESG FOCUS | Sign of average exposure Q3, 2022.4 MSCI ACWI SRI |
Unnamed: 0 Top Q3 | Unnamed: 1 IT Services and Software | Unnamed: 2 0.71% | Unnamed: 3 -4.31% | Sign of average exposure Q3, 2022 + | Sign of average exposure Q3, 2022.1 + | Sign of average exposure Q3, 2022.2 + | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 + |
Unnamed: 0 Top Q3 | Unnamed: 1 Pharmaceuticals and Life Sciences | Unnamed: 2 0.47% | Unnamed: 3 3.82% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 - | Sign of average exposure Q3, 2022.2 + | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Top Q3 | Unnamed: 1 Computers and Electronics | Unnamed: 2 0.39% | Unnamed: 3 -7.79% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Top Q3 | Unnamed: 1 Banks | Unnamed: 2 0.36% | Unnamed: 3 1.81% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Top Q3 | Unnamed: 1 Capital Markets | Unnamed: 2 0.30% | Unnamed: 3 -7.99% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 degrees | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Top Q3 | Unnamed: 1 Retailing | Unnamed: 2 0.30% | Unnamed: 3 -7.08% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 + | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 + |
Unnamed: 0 Bottom Q3 | Unnamed: 1 Oil and Gas and Consumable Fuels | Unnamed: 2 -0.24% | Unnamed: 3 39.71% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 degrees | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 degrees |
Unnamed: 0 Bottom Q3 | Unnamed: 1 Food and Beverage and Tobacco | Unnamed: 2 -0.43% | Unnamed: 3 7.38% | Sign of average exposure Q3, 2022 degrees | Sign of average exposure Q3, 2022.1 + | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 + |
Unnamed: 0 Bottom Q3 | Unnamed: 1 Integrated Oil and Gas | Unnamed: 2 -0.73% | Unnamed: 3 25.05% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 - | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Bottom Q3 | Unnamed: 1 Aerospace and Defense | Unnamed: 2 -1.04% | Unnamed: 3 20.40% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 - | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Bottom Q3 | Unnamed: 1 Utilities | Unnamed: 2 -1.37% | Unnamed: 3 7.09% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 Bottom Q3 | Unnamed: 1 Oil and Gas Exploration and Production | Unnamed: 2 -1.65% | Unnamed: 3 57.43% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 and Q2 Top Q1 | Unnamed: 1 Oil and Gas Exploration and Production | Unnamed: 2 -1.65% | Unnamed: 3 57.43% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 degrees | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 and Q2 Top Q1 | Unnamed: 1 Integrated Oil and Gas | Unnamed: 2 -0.73% | Unnamed: 3 25.05% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 - | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 and Q2 Top Q1 | Unnamed: 1 Aerospace and Defense | Unnamed: 2 -1.04% | Unnamed: 3 20.40% | Sign of average exposure Q3, 2022 - | Sign of average exposure Q3, 2022.1 - | Sign of average exposure Q3, 2022.2 - | Sign of average exposure Q3, 2022.3 degrees | Sign of average exposure Q3, 2022.4 - |
Unnamed: 0 and Q2 Top Q1 | Unnamed: 1 None | Unnamed: 2 None | Unnamed: 3 None | Sign of average exposure Q3, 2022 None | Sign of average exposure Q3, 2022.1 None | Sign of average exposure Q3, 2022.2 None | Sign of average exposure Q3, 2022.3 None | Sign of average exposure Q3, 2022.4 None |
Unnamed: 0 and Q2 Top Q1 | Unnamed: 1 None | Unnamed: 2 None | Unnamed: 3 None | Sign of average exposure Q3, 2022 None | Sign of average exposure Q3, 2022.1 None | Sign of average exposure Q3, 2022.2 None | Sign of average exposure Q3, 2022.3 None | Sign of average exposure Q3, 2022.4 None |
Unnamed: 0 and Q2 Top Q1 | Unnamed: 1 None | Unnamed: 2 None | Unnamed: 3 None | Sign of average exposure Q3, 2022 None | Sign of average exposure Q3, 2022.1 None | Sign of average exposure Q3, 2022.2 None | Sign of average exposure Q3, 2022.3 None | Sign of average exposure Q3, 2022.4 None |
Factor performance of select top and bottom industries using the MSCI Global Equity Factor Model risk model. Data between June 30, 2022, to Sept. 30, 2022, for the third quarter. Data between Dec. 31, 2021, to June 30, 2022, for the first and second quarters. All exposures are not economically significant. Exposures between -0.005 and 0.005, are marked as degrees indicating neutral exposure, + and – indicate exposures between 0.005 and 0.075 and -0.060 and -0.005.
Oil and gas exploration and production, as well as oil and gas and consumable fuels industry factors, went from high positive values in the first and second quarters to a significant negative in the third quarter. Aerospace and defense, together with integrated oil and gas industry factors reversed their performance from positive to negative as well. Some of these changes could be attributed to the second wave of the energy price-run effect that impacted energy-consumption-intensive companies. This performance shift led to an overall impact of industries on the active performance of the MSCI ACWI ESG Indexes from substantial during the first half of the year to insignificant this quarter.
Energy powering down?
It remains to be seen how each of the flagship indexes will close the year, as the effects of the energy outperformance detracted less in the third quarter than the first half of the year. The MSCI ACWI ESG Indexes have historically exhibited resilience, but dollar strengthening and exclusions of some large companies played a significant role in ESG indexes underperformance in the third quarter. Nonetheless, allocations to carbon-efficient companies within each sector continued to positively contribute to performance.
Further Reading
1Long-term specific return contribution to MSCI ACWI ESG Leaders Index performance was -0.13% between Nov. 20, 2012, and June 30, 2022.2GICS, the global industry classification standard jointly developed by MSCI and Standard & Poor’s.
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