Long-Term Performance of MSCI ESG Ratings in APAC Equity Markets
Key findings
- Over the last 11 years, companies with higher MSCI ESG Ratings have outperformed their lower-rated counterparts in the Asia Pacific (APAC) equity markets, as defined by the MSCI AC Asia Pacific Index.
- This outperformance was found in most markets within the APAC region, though with varying dispersion in its magnitude.
- Among the three pillars, governance demonstrated the highest outperformance, followed by the social and environmental pillars, though again their relative significance varied substantially across markets.
In our recent research, we found that at the global level (MSCI ACWI Index), companies with high MSCI ESG Ratings (quintile 5) outperformed those with low ratings (quintile 1) over the long term, after controlling for sectors, regions, size and equity style factors.[1] But how does this performance look in the APAC equity markets?
As with our global study, we performed a quintile analysis on the MSCI AC Asia Pacific Index[2] universe, creating quintiles using size-adjusted MSCI ESG scores and sector- and size-adjusted pillar scores to avoid any sector or size biases.[3]
Outperformance observed across all pillars
Our first exhibit shows that companies in the highest quintile for MSCI ESG Ratings for the MSCI AC Asia Pacific Index outperformed those companies in the lowest quintile between January 2013 and December 2023. Additionally, this outperformance of the highest quintile is also observed for the individual E, S and G pillars. It is, however, worth highlighting that combining the three issues into an aggregated score using an industry-specific pillar-weighting scheme provided results superior to the individual pillar scores.
Performance of companies with the highest vs. lowest MSCI ESG Ratings in the MSCI AC Asia Pacific Index
Quintiles are created every month based on adjusted scores. Pillar scores are first z-scored by Global Industry Classification Standard (GICS®)[4] sector and then size adjusted. Industry-adjusted MSCI ESG scores are only size adjusted. The next month's performance (in local return) of the quintiles is calculated. The graph shows the cumulative difference between the top and bottom quintiles' performance. Data from Dec. 31, 2012, to Dec. 29, 2023. Source: MSCI ESG Research
We also compared the performance of the aggregate MSCI ESG score in APAC markets with that of non-APAC markets and observed that it performed better in APAC than in global and other regional markets.
Performance of the aggregate MSCI ESG score in different markets
Quintiles are created every month based on size-adjusted scores. For the MSCI ACWI and MSCI World Indexes, quintiles are created per region (North America, Europe, Pacific and Emerging Markets sub-indexes for the MSCI ACWI Index and North America, Europe and Pacific for the MSCI World Index). The next month's performance (in local return) of the quintiles is calculated. The graph shows the cumulative difference between the top- and bottom-quintiles' performance. Data from Dec. 31, 2012, to Dec. 29, 2023. Source: MSCI ESG Research
Wide dispersion in performance drivers across APAC markets
Another important question investors may ask is to what extent the performance of the different MSCI ESG scores (both individually and at the aggregate level) was consistent across APAC markets. This can be a challenging question to answer due to significant differences in the number of listed companies for the individual markets. Performing a quintile analysis for each individual market could lead to a relatively small number of companies per quintile, and performance may therefore be largely driven by idiosyncratic factors.
To test the robustness of performance differentials across markets, we therefore performed a top-versus-bottom analysis using quintiles, terciles and halves, as shown in the next exhibit.[5] For most APAC markets, we found that the direction of performance differential between the top versus bottom peer set using terciles and halves was consistent with that of quintiles — indicating robustness of the performance differential.
Based on the quintile analysis, we observed a wide dispersion in the performance of the aggregate MSCI ESG score across markets, with Singapore, Hong Kong, Taiwan and Japan leading.
Market performance of companies with the highest vs. lowest MSCI ESG Ratings in the MSCI AC Asia Pacific Index
For each market, quintiles, terciles and halves are created every month based on size-adjusted scores. The next month's performance (in local return) of the quintiles is calculated. The graph shows the cumulative difference between the top- and bottom-quintiles' performance. Data from Dec. 31, 2012, to Dec. 29, 2023. Source: MSCI ESG Research
Looking deeper into the individual contribution of the E, S and G pillar scores, we observed that their relative significance differed substantially across markets. For example, while in some markets, such as Singapore, Hong Kong, Taiwan, Japan and India, all three pillars outperformed, in other markets, such as China, Thailand and Malaysia, performance across the pillars was mixed.
Performance of the MSCI E, S, G and aggregate ESG score for different APAC markets
For each market, quintiles are created every month based on adjusted scores. Pillar scores are first z-scored by GICS sector and then size adjusted. Industry-adjusted MSCI ESG scores are only size adjusted. The next month's performance (in local return) of the quintiles is calculated. The graph shows the cumulative difference between the top- and bottom-quintiles' performance. Data from Dec. 31, 2012, to Dec. 29, 2023. Source: MSCI ESG Research
Consistency between global and APAC markets
In 2023, the history of MSCI ESG Ratings reached 11 and 17 years for global and developed markets, respectively. Our performance analysis for APAC markets has shown that companies with higher MSCI ESG Ratings have outperformed their lower-rated counterparts over the long-term — consistent with the results of our study for global equity markets (MSCI ACWI Index). As with our global analysis, we found that aggregate MSCI ESG scores showed a stronger outperformance than the individual scores for the E, S and G pillars. Having said that, we observed variations in the performance of the aggregate score at the individual market level. We also observed that the relative significance of individual E, S and G scores can vary substantially across markets.
1 Analysis period was from Dec. 31, 2012, to Dec. 29, 2023.2 The MSCI AC Asia Pacific Index captures large- and mid-cap representation across five developed markets and eight emerging markets in the APAC region.3 Quintiles creation does not control for other common factors (e.g., equity style factors).4 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.5 Analysis performed for markets with more than 20 constituents as of Dec. 29, 2023. As a result, 11 out of 13 markets in the Asia Pacific region were analyzed.
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