Author Details

Yuliya Plyakha Ferenc

Yuliya Plyakha Ferenc

Vice President, MSCI Research

Saurabh Katiyar

Saurabh Katiyar

Executive Director, MSCI Research

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MSCI ESG Indexes Underperformed but Met ESG Objectives

  • 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

ESG Screened
ESG Universal
ESG Leaders
ESG Focus
SRI Index
YTD -14.4% -15.1% -14.9% -15.6% -14.9% -16.5%
1-Yr. -10.7% -11.3% -10.7% -10.9% -11.4% -9.1%
3-Yr. 8.6% 8.9% 9.3% 8.9% 9.3% 11.2%
5-Yr. 8.4% 8.6% 8.9% 8.7% 9.0% 10.7%

Returns are annualized for periods longer than a year. Gross returns for the period ending July 29, 2022.

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

                                        MSCI ACWI ESG
  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

  Industry Factors Cumulative performance
between January and
July 2022
Top Oil and gas exploration and production 62.30%
Oil and gas consumable fuels 44.61%
Energy equipment and services 39.21%
Integrated oil and gas 27.13%
Fertilizers and agricultural chemicals 24.72%
Aerospace and defense 17.92%
Bottom Retailing -7.00%
Capital markets -8.00%
Consumer durables and apparel -8.58%
Real estate management -11.83%
Media -11.97%
Internet software and services -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.



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.



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