The Drivers of ESG Returns

In the first half of 2020, as the COVID-19 crisis affected financial markets, all standard MSCI ACWI ESG equity indexes outperformed their market-capitalization benchmarks. Where has this outperformance come from? Have inflows into ESG investments driven up equity valuations, possibly creating a price bubble? We used the MSCI GEMLTESG factor model to get a better understanding of performance. The findings provide an economic rationale for categorizing ESG as a fundamental factor that typically derives returns from long-term earnings growth.

Relative Performance of MSCI ACWI ESG Indexes

Data from May 31, 2013, to Nov. 30, 2020 (last rebalance of MSCI ACWI). MSCI ESG Screened is an exclusion-based index that does not incorporate MSCI ESG Ratings; MSCI ESG Universal Index represents an ESG weight-tilt approach; MSCI ESG Leaders is a 50% best-in-class sector approach; MSCI SRI is a 25% best-in-class sector approach; and MSCI ESG Focus is an optimized approach designed to maximize  ESG exposure.

The data shows live-track performance for each index: MSCI ACWI ESG Leaders has been live since June 6, 2013; MSCI ACWI SRI since March 24, 2014; MSCI ACWI ESG Universal since Feb. 8, 2017;  MSCI ACWI ESG Focus since June 25, 2018; and MSCI ESG Screened since Dec. 14, 2018.