Our analysis suggests that incorporating ESG and sustainability considerations into Islamic finance not only aligns with the ethical mandates of Sharia law but also has the potential to improve financial outcomes. 

The MSCI Climate Indexes fall into one of three categories — reduce fossil-fuel exposure, finance the transition and align with net-zero policies — designed to reflect investors’ broad range of climate-related preferences.  

Historically, climate investing has focused on portfolio decarbonization, but investors are increasingly turning to a “finance-the-transition” approach, seeking to invest in transition opportunities. The two approaches are not exclusive and best used hand in hand. 

MSCI Implied Temperature Rise (ITR) can be used to assess the temperature alignment of companies and portfolios with global climate goals. Here, we offer an attribution framework to understand what causes a portfolio’s ITR to change over time.

Assessing the carbon footprint of a portfolio is the first step in addressing the investment implications of climate change. But in a complex and fast evolving landscape, which are the best metrics and underlying inputs to use?  

Over the long term, companies with higher MSCI ESG Ratings have outperformed in the Asia Pacific equity markets. Among the three pillars, governance demonstrated the highest outperformance, followed by the social and environmental pillars. 

Based on a quintile analysis for MSCI ESG Ratings for the MSCI Europe Index, we found that companies in the highest quintile have consistently outperformed those in the lowest quintile since 2013, when these ratings were first introduced. 

 Controlling for sectors, regions and company size, we assessed the financial performance of MSCI ESG Ratings in global and developed markets and found that companies with higher ratings outperformed their lower-rated counterparts over the long term.

Understanding ESG risks and opportunities from the perspective of investors could be invaluable for issuers. We examine how investors think about ESG factors and how they incorporate them into their investment processes. 

Assessing the carbon footprint of their lending and investment activities is crucial for banks to achieve stated net-zero targets. Using a fictious bank’s balance sheet, we show how MSCI Total Portfolio Footprinting can help calculate financed emissions.

Measuring financed emissions is crucial for climate disclosure, but not always straightforward. Proper data alignment and timeliness are essential to help investors make informed decisions and contribute to effective climate action.

We explore the methodologies behind the MSCI ESG Indexes to see how they integrate ESG considerations. We also assess the differences of these approaches in terms of the financial and ESG characteristics to understand potential trade-offs. 

We analyze the index-level carbon emissions of the MSCI ACWI, ACWI ESG and Socially Responsible Investing Indexes, in terms of both financed emissions and emissions intensities, to see what the trends are and what’s driving them.

Climate stress-testing models like MSCI Climate VaR may be complex, but their main mechanisms can be explained using linear regression. This helps transform input variables into risk outputs, making it easier for investors to understand the primary drivers.  

Our previous research discussed a framework for investors to attribute changes in equity portfolios’ emissions to their primary drivers. We now adapt it to identify and analyze two approaches to tracking a multi-asset-class portfolio’s carbon footprint. 

Several factors can drive the changes in a corporate-bond portfolio’s emissions. Our framework helps disentangle these variables and provides investors with greater clarity into their climate-aware strategies. 

Tracking a portfolio’s carbon footprint can be challenging given the multiple drivers of changes in emissions. Our framework attributes these changes to their primary drivers, including changes in issuers’ emissions, ownership and financing structure.

Climate-friendly policies and regulations and the massive reallocation of capital needed in the coming years to ensure a successful shift to a net-zero economy should continue to expand the range of opportunities for both companies and investors.

We present a framework that allows investors to understand to what extent changes in a portfolio’s carbon footprint are due to companies’ real-world decarbonization efforts, a portfolio manager’s investment decisions or changes in companies’ financing.

Following extensive research showing an improvement in risk-adjusted returns for companies with higher ESG ratings, we look beyond what a company’s ESG issues were to how that company dealt with them — and the impact that had on stock-specific risk.

Our analysis of ESG factor performance in 2022 suggests that time horizons, as well as specific sectors and regions, may be significant in assessing the return characteristics of ESG portfolios. 

In this paper, we highlight to investors and portfolio managers the significance of climate-change risk for the value of corporate bonds, as well as provide a framework for further research in this area.

Climate metrics can often be a daunting field, with misunderstanding and confusion rife. We present a two-step toolkit that can help investors identify the most suitable metrics as they look to gauge progress toward their climate-investing goals.

With no “one fits all” solution, to help investors identify the most suitable climate metrics, we take an in-depth look at MSCI ESG Research’s climate metrics in terms of what they measure, how they are calculated and their potential use cases. 

Asset owners who want to keep global warming below 1.5 degrees Celsius (1.5°C) have a tough row to hoe.

Time horizons are key to understanding the impact of environmental, social and governance on stock returns. This paper, which was published in Investments & Wealth Monitor, illustrates the relative importance of event risk vs. erosion risks over time.

Among the devastating effects of the Russia-Ukraine war is the potential to derail the world from its already difficult path to net-zero. We analyzed how the war could affect the world’s carbon emissions and decarbonization efforts — and investors.

Europe’s search for energy sources outside of Russia may slow the low-carbon transition in the short term. Staying within a net-zero cumulative emissions budget would mean fewer emissions later. What might this path mean for investors’ portfolios?

Environmental, social, and governance (ESG) investing is a very broad field with many different investment approaches addressing various investment objectives across asset classes. While there are many studies relating to ESG in equities, the risk assessment of ESG considerations within fixed income may be equally if not more important. 

ESG ratings are widely used in active management and ESG indexes, with a growing focus on climate change. This has increased debate around two questions: Why are ESG ratings so different across providers? And how do ESG ratings reflect climate risk?

While investors around the world are committing to bring the carbon footprints of their portfolios to net-zero by 2050, figuring out how to do so is not a simple matter. What alternatives do investors have?

Investors have a key role in keeping global warming well below 2°C. We examine four strategic levers that investors can use to accelerate companies’ decarbonization: a shift of capital, active stewardship, financing of low-carbon solutions and policy advocacy. 

To what extent has climate risk been priced into equity markets? How can we model such risks as the world moves toward net-zero targets? We show how climate has increased in importance in the last two years, with potential long-term implications for understanding equity markets.

How are environmental, social and governance (ESG) ratings constructed? Which indicators are the most important in assessing ESG characteristics? Does the answer vary by sector? This foundational paper examines the impact on financial performance of two types of ESG indicators: the individual E, S and G pillars scores and the underlying ESG Key Issue scores.  

To what extent has climate risk been priced into equity markets? Is there a “brown” discount and a “green” premium? Has this shifted over time? How can we model such risks as the world moves toward net-zero targets? We examine the financial impact of climate transition risk on global equity markets.

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?

ESG investing makes up an increasingly large footprint in equity portfolios, but ESG integration in bond portfolios is still in its early days. We examine the characteristics that make high-ESG-rated corporate-bond portfolios distinct.

As we’ve previously demonstrated, incorporating firm-level ESG characteristics into portfolio construction can preserve, and even improve, risk and return relative to the broad market. Here we follow-up by asking how an allocator can integrate ESG considerations efficiently across multiple portfolios in its equity program.

Inflows into ESG funds have soared in recent years and months, in part motivated by outperformance since the COVID-19 pandemic erupted. But have these inflows become a self-fulfilling prophecy, creating an ESG bubble?

How did incorporating ESG factors affect the performance of corporate-bond portfolios? Did ESG add insights beyond credit ratings? How did ESG impact risk and performance of investment-grade and high-yield bonds? Short-dated versus long-dated bonds?

How one combines environmental, social and governance scores into an overall ESG rating can have a significant impact on its usefulness to investors. We tested two approaches: equal weighting and backward optimization. The results suggest that investors proceed with caution. As published in The Journal of Impact & ESG Investing.

Our recent research suggests that environmental and social issues were more industry specific and tended to show up in financial measures over a longer time frame compared to governance issues. How can E, S and G issues be combined?

Very different ESG issues can be material for different industries. Our research suggests that risks can be divided into two main types: “event” risks and “erosion” risks to companies’ long-term competitiveness. Which ones mattered most for E, S and G?

The conventional wisdom has it that governance is the most dominant of the three E, S and G pillars. But our analysis finds different results when looking at contribution to performance over different time horizons.

The COVID-19 outbreak is the first real-world test since the 2008 global financial crisis of the resilience of companies with high MSCI ESG Ratings. We analyze the performance of four standard MSCI ESG Indexes over Q1 2020 and longer periods.

Global equity investors use regions as building blocks in asset allocation, typically segregating markets by how developed they are and by geography. Has globalization reduced the potential for geographical portfolio diversification?

Many investors want to stick to their values or beliefs, as well as meet certain financial objectives. How can ESG indexes  help them address these goals?

Many researchers have studied the link between companies’ Environmental, Social and Governance (ESG) characteristics and financial risk and performance. This paper examines some of the underlying economic questions: How have markets priced ESG characteristics? Have they been fully priced? Have there been sweetspots? How quickly did the market incorporate ESG information? We investigate these questions by looking into how changes in companies’ ESG profiles have historically predicted equity...

How can ESG characteristics be integrated consistently across factor-based and active equity allocations? In Part 4 of the Foundations of ESG Investing paper, we discuss two approaches to applying ESG ratings to factor-based allocations – a one-step and a two-step approach – asking which has done a better job at combining the underlying strategy with ESG while maintaining exposure to target factors. We then investigate overlaying ESG ratings and ESG momentum on the historical holdings of...

According to recent surveys, asset owners’ have shifted their main focus to ESG’s financial benefits, as opposed to social benefits. In the third part of this paper, we discuss how ESG can be integrated into indexed allocations using MSCI ESG Ratings, which provided better risk-adjusted returns from August 2010 to December 2017 than the MSCI ACWI Index. We used existing best-in-class selection-based index methodologies (the MSCI ESG Leaders Index) for the creation of hypothetical global and...

Many studies have focused on the relationship between companies with strong ESG characteristics and corporate financial performance.  However, these have often struggled to show that positive correlations — when produced — can in fact explain the behavior. This paper provides a  link between ESG information and the valuation and performance of companies, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile...

Are ESG characteristics tied to stock performance? Many researchers have studied the relationship between companies with strong environmental, social and governance (ESG) characteristics and corporate financial performance. A major challenge has been to show that positive correlations — when produced — explain the behavior. As the classic phrase used by statisticians says, “correlation does not imply causation.”