MSCI ESG Indexes Underperformed but Met ESG Objectives

Blog post
6 min read
Yuliya Plyakha Ferenc, Saurabh Katiyar
August 24, 2022
  • The "buildup period" of the Russia-Ukraine war produced substantial underperformance of the five flagship MSCI ACWI Indexes, but the "war-continuation" period had a less severe effect.
  • The main detractors were value outperformance, as well as lower allocations to energy and aerospace and defense. Higher than average MSCI ESG Ratings, carbon efficiency and low-risk allocations were positive contributors.
  • The MSCI ACWI ESG Indexes have historically outperformed the MSCI ACWI Index. These indexes are designed to have enhanced MSCI ESG Ratings and, in some cases, values-based alignment.
As investors seek to build ESG solutions, there is a continued emphasis on ESG mindfulness. And with different ESG solutions comes varied levels of risk and return, including the impact of unexpected events, such as the ongoing Russia-Ukraine war. Since the ESG investment environment is perpetually evolving, investors may want to focus on key attributes and metrics that are of particular interest and manage portfolios accordingly.
First-half-2022 performance in detail
The MSCI ACWI ESG Indexes have outperformed MSCI ACWI Index over the last three and five years, but they underperformed in the year-to-date period and over the past year through July 29, as shown in the table below.
Relative index performance over time
Unnamed: 0
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
Unnamed: 0

YTD

MSCI ACWI Index

-14.4%

MSCI ACWI ESG Screened Index

-15.1%

MSCI ACWI ESG Universal Index

-14.9%

MSCI ACWI ESG Leaders Index

-15.6%

MSCI ACWI ESG Focus Index

-14.9%

MSCI ACWI SRI Index

-16.5%

Unnamed: 0

1-Yr.

MSCI ACWI Index

-10.7%

MSCI ACWI ESG Screened Index

-11.3%

MSCI ACWI ESG Universal Index

-10.7%

MSCI ACWI ESG Leaders Index

-10.9%

MSCI ACWI ESG Focus Index

-11.4%

MSCI ACWI SRI Index

-9.1%

Unnamed: 0

3-Yr.

MSCI ACWI Index

8.6%

MSCI ACWI ESG Screened Index

8.9%

MSCI ACWI ESG Universal Index

9.3%

MSCI ACWI ESG Leaders Index

8.9%

MSCI ACWI ESG Focus Index

9.3%

MSCI ACWI SRI Index

11.2%

Unnamed: 0

5-Yr.

MSCI ACWI Index

8.4%

MSCI ACWI ESG Screened Index

8.6%

MSCI ACWI ESG Universal Index

8.9%

MSCI ACWI ESG Leaders Index

8.7%

MSCI ACWI ESG Focus Index

9.0%

MSCI ACWI SRI Index

10.7%

Returns are annualized for periods longer than a year. Gross returns for the period ending July 29, 2022.
Performance of the five MSCI ACWI ESG Indexes year to date
Financial-market geopolitical and macroeconomic risks rose in the first half of 2022. We found that the outbreak of the Russia-Ukraine war on Feb. 24 presented two separate stories that explained the performance of the five MSCI ACWI ESG Indexes.

Performance of the five MSCI ACWI ESG Indexes year to date

We illustrate the performance of the MSCI ACWI ESG indexes thus far in 2022.
Performance of MSCI ESG indexes relative to MSCI ACWI Index rebased at 100 on Dec. 31, 2021. Data from Dec. 31, 2021, to July 29, 2022.
As shown below, in the "buildup period," the weeks before the outbreak of the Russia-Ukraine war (Jan. 1 to Feb. 23), higher oil and gas prices and a macroeconomic environment that was conducive to inexpensive stocks, led to a decline in the performance of the MSCI ACWI ESG Indexes. We also highlight the "war-continuation" period, which was a relatively less volatile interval.
Active factor-return attribution of the MSCI ACWI ESG Indexes

None

MSCI ACWI ESG SCREENED

MSCI ACWI ESG UNIVERSAL

MSCI ACWI ESG LEADERS

MSCI ACWI ESG FOCUS

MSCI ACWI SRI

None

Build up

Cont.

Build up

Cont.

Build up

Cont.

Build up

Cont.

Build up

Cont.

Total active

-0.61%

-0.16%

-0.54%

-0.04%

-0.89%

-0.46%

-0.42%

-0.21%

-2.79%

-0.53%

Common factor

-0.47%

-0.25%

-0.21%

-0.11%

-0.89%

-0.36%

-0.13%

-0.22%

-2.21%

-0.02%

Country

-0.02%

-0.03%

-0.07%

-0.02%

-0.03%

-0.02%

-0.03%

-0.06%

-2.02%

-0.16%

Industry

-0.24%

-0.38%

-0.16%

-0.24%

-0.42%

-0.91%

-0.03%

-0.21%

-0.70%

-0.02%

Risk indices

-0.21%

0.10%

0.02%

0.33%

-0.50%

-0.53%

-0.05%

-0.36%

-1.53%

-0.52%

Currency

-0.02%

0.00%

-0.05%

-0.29%

-0.01%

-0.13%

-0.03%

-0.12%

-0.01%

-0.19%

World

-0.02%

0.00%

-0.05%

-0.29%

-0.01%

-0.13%

-0.03%

-0.12%

-0.01%

-0.19%

Specific

-0.13%

0.07%

-0.29%

0.09%

0.01%

0.01%

-0.29%

-0.31%

-0.61%

0.63%

Rebalancing effect

0.01%

0.02%

0.00%

0.05%

0.00%

0.01%

0.01%

0.00%

0.01%

0.12%

Active factor-return attribution for the MSCI ACWI ESG Indexes during buildup and war-continuation periods of Russia-Ukraine war. Dec. 31, 2021, to July 29, 2022.
Energy stocks experienced high returns, particularly at the beginning of this year when oil prices spiked and the economy was recovering from the pandemic lockdowns. Similarly, aerospace and defense stocks started the year on a positive note, helped by expectations of higher demand of defense equipment related to the Russia-Ukraine war. While the five MSCI ACWI ESG Indexes were constructed to avoid large active allocations in sectors, small active sector exposures during shorter and turbulent periods can lead to significant return contributions. And while energy and aerospace and defense have had low active allocations in the MSCI ESG Indexes this year, which reflects the values and integration alignment of these indexes, their active-performance contribution has been substantially negative due to strong returns in those sectors.
Industry performance
Unnamed: 0
Industry Factors
Cumulative performance between January and July 2022
Unnamed: 0

Top

Industry Factors

Oil and gas exploration and production

Cumulative performance between January and July 2022

62.30%

Unnamed: 0

Top

Industry Factors

Oil and gas consumable fuels

Cumulative performance between January and July 2022

44.61%

Unnamed: 0

Top

Industry Factors

Energy equipment and services

Cumulative performance between January and July 2022

39.21%

Unnamed: 0

Top

Industry Factors

Integrated oil and gas

Cumulative performance between January and July 2022

27.13%

Unnamed: 0

Top

Industry Factors

Fertilizers and agricultural chemicals

Cumulative performance between January and July 2022

24.72%

Unnamed: 0

Top

Industry Factors

Aerospace and defense

Cumulative performance between January and July 2022

17.92%

Unnamed: 0

Bottom

Industry Factors

Retailing

Cumulative performance between January and July 2022

-7.00%

Unnamed: 0

Bottom

Industry Factors

Capital markets

Cumulative performance between January and July 2022

-8.00%

Unnamed: 0

Bottom

Industry Factors

Consumer durables and apparel

Cumulative performance between January and July 2022

-8.58%

Unnamed: 0

Bottom

Industry Factors

Real estate management

Cumulative performance between January and July 2022

-11.83%

Unnamed: 0

Bottom

Industry Factors

Media

Cumulative performance between January and July 2022

-11.97%

Unnamed: 0

Bottom

Industry Factors

Internet software and services

Cumulative performance between January and July 2022

-17.26%

First-half drags on performance
We previously asserted that high-ESG-rated companies have tended to be associated with expensive stocks, lower idiosyncratic volatility and lower systematic risk. Thus, the lack of a value allocation played an important role in the underperformance of MSCI ACWI ESG Indexes and was a significant headwind during the buildup period of the war. Throughout the war-continuation period, when gas shortages in Europe started to emerge, an overweight of carbon-efficient stocks within each sector had a positive effect on the performance of the ESG Indexes. Companies with a higher-than-average MSCI ESG Rating and low-risk stocks also played a significantly role in the recovery of the MSCI ACWI SRI Index and lessened the underperformance of the other MSCI ACWI ESG Indexes.1
Factors during phases of the Russia-Ukraine war
Data for buildup period, from Dec. 31, 2021, to Feb. 23, 2022, and for war-continuation period, from Feb. 23 to July 29, 2022.
ESG ratings goal attainment
The MSCI ACWI ESG Screened Index incorporates values-based exclusions with a pro-rata reallocation of capital to the remaining stocks. The other ESG indexes use MSCI ESG Ratings for security selection and allocation and are expected to show a significant improvement in ESG score over the parent index (as shown below). The MSCI ACWI ESG Screened Index doesn't use MSCI ESG Ratings, so it usually has a similar aggregated ESG score as the parent index. The other four MSCI ACWI ESG Indexes had a higher MSCI ESG score over their parent during this period of study, which is in line with the main objective of these indexes. We also saw an improvement of each of the ESG pillar scores for these four MSCI ACWI ESG Indexes.
The relative improvement of ESG score
Dec. 31, 2021, to June 30, 2022.
First-half performance and ESG efficacy
The five flagship MSCI ACWI ESG Indexes were adversely impacted by the rally in energy and defense stocks, as well as the outperformance of cheaper companies during the buildup to the Russia-Ukraine war. However, the performance of high ESG-rated, carbon-efficient and low-risk stocks during the war-continuation period helped bolster performance.
Further Reading
Breaking Down the Direct Indexing Investment Process Value and Growth Investing as ESG and Climate Friendly - MSCI Climate Indexes Brought Short-Term Gloom with Blooming Offshoots
Yuliya Plyakha Ferenc
Yuliya Plyakha Ferenc
Vice President, MSCI Research
Saurabh Katiyar
Saurabh Katiyar
Executive Director, MSCI Research

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1The carbon-efficiency factor of the MSCI’s Barra Global Equity Model + ESG is based on the Scope 1, 2 and 3 emissions intensity relative to enterprise value including cash. For individual stocks, a positive (negative) exposure indicates the stock has lower (higher) emissions intensity than sector peers.

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