In our recent research, we found that at the global level (MSCI ACWI Index), companies with high MSCI ESG Ratings (quintile 5) outperformed those with low ratings (quintile 1) over the long term, after controlling for sectors, regions, size and equity style factors.[1] But how does this performance look in the APAC equity markets?
As with our global study, we performed a quintile analysis on the MSCI AC Asia Pacific Index[2] universe, creating quintiles using size-adjusted MSCI ESG scores and sector- and size-adjusted pillar scores to avoid any sector or size biases.[3]
Outperformance observed across all pillars
Our first exhibit shows that companies in the highest quintile for MSCI ESG Ratings for the MSCI AC Asia Pacific Index outperformed those companies in the lowest quintile between January 2013 and December 2023. Additionally, this outperformance of the highest quintile is also observed for the individual E, S and G pillars. It is, however, worth highlighting that combining the three issues into an aggregated score using an industry-specific pillar-weighting scheme provided results superior to the individual pillar scores.
Performance of companies with the highest vs. lowest MSCI ESG Ratings in the MSCI AC Asia Pacific Index
We also compared the performance of the aggregate MSCI ESG score in APAC markets with that of non-APAC markets and observed that it performed better in APAC than in global and other regional markets.
Performance of the aggregate MSCI ESG score in different markets
Wide dispersion in performance drivers across APAC markets
Another important question investors may ask is to what extent the performance of the different MSCI ESG scores (both individually and at the aggregate level) was consistent across APAC markets. This can be a challenging question to answer due to significant differences in the number of listed companies for the individual markets. Performing a quintile analysis for each individual market could lead to a relatively small number of companies per quintile, and performance may therefore be largely driven by idiosyncratic factors.
To test the robustness of performance differentials across markets, we therefore performed a top-versus-bottom analysis using quintiles, terciles and halves, as shown in the next exhibit.[5] For most APAC markets, we found that the direction of performance differential between the top versus bottom peer set using terciles and halves was consistent with that of quintiles — indicating robustness of the performance differential.
Based on the quintile analysis, we observed a wide dispersion in the performance of the aggregate MSCI ESG score across markets, with Singapore, Hong Kong, Taiwan and Japan leading.
Market performance of companies with the highest vs. lowest MSCI ESG Ratings in the MSCI AC Asia Pacific Index
Looking deeper into the individual contribution of the E, S and G pillar scores, we observed that their relative significance differed substantially across markets. For example, while in some markets, such as Singapore, Hong Kong, Taiwan, Japan and India, all three pillars outperformed, in other markets, such as China, Thailand and Malaysia, performance across the pillars was mixed.
Performance of the MSCI E, S, G and aggregate ESG score for different APAC markets
Consistency between global and APAC markets
In 2023, the history of MSCI ESG Ratings reached 11 and 17 years for global and developed markets, respectively. Our performance analysis for APAC markets has shown that companies with higher MSCI ESG Ratings have outperformed their lower-rated counterparts over the long-term — consistent with the results of our study for global equity markets (MSCI ACWI Index). As with our global analysis, we found that aggregate MSCI ESG scores showed a stronger outperformance than the individual scores for the E, S and G pillars. Having said that, we observed variations in the performance of the aggregate score at the individual market level. We also observed that the relative significance of individual E, S and G scores can vary substantially across markets.