The Efficacy of ESG Momentum
Prior MSCI research has shown that ESG momentum — a measure of year-over-year changes to a company's industry-adjusted ESG score — has been an impactful financial indicator, but it's important to reassess its validity in the current market environment. To do this, we divide the MSCI ACWI Index universe into quintiles based on ESG momentum score and review the historical performance. We found meaningful outperformance of the top-quintile for ESG momentum vs. the bottom quintile over the long term. And while the metric has dulled somewhat in recent months, the long-term value of the measurement was still quite apparent.
Style and substance
We then looked at the correlation of ESG momentum to traditional style factors, and found it was negatively correlated with almost all of them. This tells us that ESG momentum may have the potential to increase portfolio diversification and could be a useful financial indicator for portfolio construction.
Historical performance of ESG momentum
We segmented the MSCI ACWI Index into equally weighted quintiles by sorting ESG momentum from high to low rebalancing at each month and measuring cumulative-performance difference of the top ESG momentum quintile over the bottom ESG momentum quintile from June 2009 to June 2022. Performance is calculated on an equal-weighted monthly basis, long top quintile, short bottom quintile.
Correlation of ESG momentum to other style factors
Data from June 2009 to June 2022. Factor data from MSCI’s Barra Global Equity Model for Long-Term Investors. ESG data for stocks from the MSCI ESG Ratings.
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