Long-Term Performance of MSCI ESG Ratings in Japan’s Equity Market

Over the past 12 years, Japanese companies with higher MSCI ESG Ratings have outperformed their lower-rated peers. We ranked companies in the MSCI Japan Index on their approach to financially relevant sustainability risks for each month from Dec. 31, 2012, to Dec. 31, 2024, and compared the subsequent equity-market performance of the top and bottom quintiles. Over that period, companies with the highest MSCI ESG Ratings score (top quintile companies) outperformed their lower-scored peers (bottom quintile companies) by an active annualized return of around 3.2%. The same was true for each pillar within MSCI ESG Ratings — companies with higher environmental, social or governance pillar scores were generally associated with stronger market performance.

To understand the contribution of the ESG factor to the overall active return of top quintile companies relative to bottom quintile companies, we decomposed the active return into different factors. We found that the ESG factor contributed positively to active returns of the top quintile, with annualized contributions of 0.65%. We performed similar analysis with the individual pillar scores and observed positive annual contributions of 0.12% for environmental, 0.27% for social and 0.33% for governance. This outcome was driven by both a positive exposure to the respective score (ESG factor or pillar scores) and its strong performance.

These findings suggest that integrating ESG factors into investment decisions may have enhanced long-term returns in the Japanese equity market. Investors looking for sustainable performance may wish to consider companies’ MSCI ESG Ratings.