Long-Term Performance of MSCI ESG Ratings in European Equity Markets
Key findings
- In European equity markets, companies with higher MSCI ESG Ratings outperformed their lower-rated counterparts over the long term, when controlling for size and sectors.
- Assessing these markets individually, this outperformance was found in most countries, though with varying dispersion in the magnitude of the results.
- Performance was positive across all sectors except real estate and information technology. Health care and energy showed the strongest outperformance.
MSCI ESG Ratings are intended to allow investors to incorporate information about financially relevant environmental, social and governance risks and opportunities into the investment process. They have been in place for developed and emerging equity markets (as measured by the MSCI ACWI Index) since 2013. But have they met their goal of delivering better risk-adjusted returns?
Our analysis at a global level has shown that, over the longer term, companies with higher MSCI ESG Ratings have outperformed those with lower ratings when controlling for sectors, regions, size and equity-style factors. These returns have also led to an outperformance of standard MSCI ESG indexes at a global level.
Returns in European equity markets
Similar to our global study, we performed a quintile analysis on the MSCI Europe Index universe, creating quintiles using industry- and size-adjusted MSCI ESG scores to avoid sector and size biases.
The exhibit below shows that companies in the highest quintiles for MSCI ESG Ratings for the MSCI Europe Index have consistently outperformed those companies in the lowest quintile over the last 11 years. As with our global results, the total MSCI ESG score showed the most consistent outperformance when compared to the quintile performance of individual scores for the E, S and G pillars. There are, however, some differences worth highlighting: In Europe, the performance of the E pillar was lower, and performance of the G pillar much stronger, when compared to global markets.
Performance of companies with the highest- vs. lowest MSCI ESG Ratings in the MSCI Europe Index
Quintiles are created every month based on adjusted scores: Pillar scores are first z-scored by Global Industry Classification Standard (GICS®) sector and then size-adjusted. For industry-adjusted MSCI ESG scores, we control for size. 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
Country and sectoral analysis
Another important question investors may ask is to what extent the observed performance of MSCI ESG Ratings in the European market was consistent across countries or sectors. This can be a challenging question to answer due to significant differences in the market capitalization of the individual markets, of the sectors within those markets and the number of listed companies. Performing a quintile analysis for each country or sector individually 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 countries and sectors, we therefore performed a top-versus-bottom analysis using quintiles, terciles and halves, as shown in the next two exhibits. As expected, we found a much greater dispersion in both country and sector performance when using quintiles rather than terciles or halves.
To start with, we assessed the extent to which the outperformance of companies with higher MSCI ESG Ratings was consistent across GICS sectors.[1] We observed that the performance differences between the top- and bottom-rated companies were positive in all sectors except for real estate and information technology. The tercile performance was also slightly negative for industrials. It is interesting to note that for health care, energy and utilities, the levels of outperformance were notably higher in Europe than in our global analysis.
Sector performance of companies with the highest- vs. lowest MSCI ESG Ratings in the MSCI Europe Index
The graph shows the cumulative difference between the performance of the top and bottom quintile/tercile/half per GICS sector. Data from Dec. 31, 2012, to Dec. 29, 2023. Source: MSCI ESG Research
We also analyzed performance differences at the country level. Looking at top versus bottom halves, results were positive in all European countries except for Denmark and France, where the performance differentials were relatively flat. Performance of the tercile and quintile portfolios was also positive for most countries, with a few exceptions: Israel and France, when using both terciles and quintiles, and Italy, when using quintiles.
Country performance of companies with the highest- vs. lowest MSCI ESG Ratings in the MSCI Europe Index
The graph shows the cumulative difference between the performance of the top and bottom quintile/tercile/half performance per country. Data from Dec. 31, 2012, to Dec. 29, 2023. Source: MSCI ESG Research
Consistency between global and European markets
Our analysis of European equity markets shows outperformance of companies with high MSCI ESG Ratings compared to their lower-rated counterparts — consistent with the results of our study of global equity markets (MSCI ACWI Index). As with our global analysis, we found the total MSCI ESG score showed more significant performance results than individual scores for the E, S and G pillars. A key difference worth noting, however, is that performance results in Europe were more consistently positive across sectors than for global markets and were especially strong in health care, energy and utilities.
1 GICS is the industry-classification standard jointly developed by MSCI and S&P Market Intelligence.
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