Hero - ESG Integration Research Overview
ESG and Financial Performance: Research Overview
Social Sharing
Intro - ESG Integration Research Overview
ESG integration, or the inclusion of ESG factors into the investment process, has evolved over time. For example, some investment managers actively pursue strategies that exclude stocks with poor ESG characteristics while others focus on only selecting stocks with better ESG characteristics. While there is a robust set of ESG data and metrics to analyze portfolios, many investors want to know how much their ESG strategies are contributing to overall portfolio risk and return.
MSCI has performed extensive research to assess the risk and performance characteristics of MSCI ESG Ratings and MSCI ESG Indexes — it is detailed in the research papers listed below underneath each section.
At a high level, our research looked at stock and fundamental (earnings) performance, systematic risks and idiosyncratic risks. Here, we answer some commonly asked questions, presenting key findings and links to the full blog posts or reports for greater detail.
Video - ESG and Financial Performance
ESG and Financial Performance
In the ever-evolving landscape of investing, ESG Ratings have been criticized both for being too focused on ethical considerations and not focused enough on these issues. The true goal of MSCI’s ESG Rating methodology is to provide investors with a tool for assessing corporate risks as they work to build better portfolios.
Did a company's ESG performance affect its stock price?
ESG pure factor return
This chart shows the performance of investments based purely on ESG factors in MSCI risk models over time. The fluctuations in returns highlight the varying impact that ESG factors can have on investment performance.
Learn more: Factoring in ESG
Source: MSCI. Data from 31 December 2012 till 31 May 2023. The chart shows the cumulative performance of MSCI ESG factor (defined as the z-score of MSCI ESG Industry-adjusted ESG score) in the MSCI Global Equity Factor Model + ESG (GEMLTESG) model.
https://www.msci.com/www/blog-posts/factoring-in-esg/02343304664
Cumulative performance of quintile 5 – quintile 1 portfolios in MSCI ACWI Index
This chart details the performance of the MSCI ACWI Index Quintile (highest rated quintile minus lowest rated quintile). Additionally, the performance of individual E, S, and G pillars is also displayed, providing a more detailed understanding of the impact of each ESG component on portfolio performance.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by Global Industry Classification Standard (GICS®) sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The next month’ performance (in local return) of the quintiles is calculated. The graph shows the cumulative difference between the top and bottom quintiles’ performance.
Further related content:
What is the fundamental performance of MSCI ESG Ratings?
We analyzed the potential company-specific competitive advantage of high ESG ratings and looked at fundamental returns following the hypothetical cash-flow transmission channel. High dividend-yields play an essential role in our analysis because sustainability investors typically have a longer-term investment horizon.
Learn more: Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance (PDF, 5 MB)
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The average value of the fundamental data, shown in a z-score format, by quintile is calculated every month, and the distribution of the monthly averages is plotted in the boxplots.
Further related content:
What is the company-specific risk profile of MSCI ESG Ratings?
Residual capital asset pricing model (CAPM) volatility
To understand how ESG characteristics are linked to tail risks, this chart compares the residual volatility of companies across ESG quintiles (i.e., the volatility that is not explained by the common factors in the MSCI Barra Global Equity Model).
We looked at company specific risks following the hypothetical transmission channel:
Idiosyncratic risk incident frequency
Our research tracks the number of idiosyncratic risk incidents in a company's stock price. This chart shows how often these incidents occurred for companies in both the highest and lowest ESG rating quintiles.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The maximum drawdowns over the next rolling 36 monthly are calculated for each stock. The number of drawdowns larger than 95% are counted and plotted for quintile 1 and 5.
Learn more: Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance
Drawdown frequency ratio of MSCI ESG Ratings and pillars
We plotted the ratio of drawdowns observed in the top and bottom quintiles. This informs of the differences in stock-specific risks between companies with low and high MSCI ESG ratings, respectively.
Source: MSCI. Data from 31 December 2012 till 31 May 2023.
Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The maximum drawdowns over the next rolling 36 months are calculated for each stock. For each loss threshold, the number of drawdowns larger than the threshold are counted each month, and average over the sample period. The ratio of average drawdown occurrences in quintile 1 and quintile 5 is plotted.
How does a company's ESG profile impact its exposure to systematic risk?
Here, we assess how a company’s ESG profile impacts its exposure to systematic risk and how this impact may ultimately lead to financially significant effects. We looked at systematic risks following the hypothetical transmission channel:
Source: MSCI. Data from 31 December 2012 till 31 May 2023 (except for WACC where data starts on 31 August 2015). Quintiles are created every month based on adjusted scores: pillar scores are first z-scored by GICS sector and region (North America, Europe, Pacific and EM sub-indices of MSCI ACWI) then size adjusted. ESG score is only z-scored by region, then size adjusted. The average value of the fundamental data, shown in a z-score format, by quintile is calculated every month, and the distribution of the monthly averages is plotted in the boxplots.
Learn more: Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance
What is the long-term performance of MSCI ESG Indexes?
Historical performance analysis
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Relative performance versus MSCI ACWI. MSCI ACWI ESG Universal has life track record since 28 Feb 2017; MSCI ACWI ESG Focus since 30 Jun 2018. MSCI ACWI ESG Leaders since 30 June 2013. MSCI ACWI SRI since 31 Mar 2014. Ratio of index levels relative to MSCI ACWI index level, rebased to 100 on 31 Dec 2012.
Source: MSCI. Data from 31 December 2012 till 31 May 2023. Active returns are calculated relative to the MSCI ACWI Index.
Further related content:
final - ESG Integration Research Overview
DISCLAIMER
MSCI ESG Ratings, research and data are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG and Climate Indexes are products of MSCI Inc. that utilize information from MSCI ESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK).
Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results.
FOR PROFESSIONAL CLIENTS ONLY
The content of this web page is research for informational purposes only and is intended for institutional professionals with the analytical resources and tools necessary to interpret any performance information. Nothing herein is intended to promote or recommend any product, tool or service.