The Efficacy of ESG Momentum

Prior MSCI research has shown that ESG momentum — a measure of year-over-year changes to a company’s industry-adjusted ESG score — has been an impactful financial indicator (opens in a new tab), but it’s important to reassess its validity in the current market environment. To do this, we divide the MSCI ACWI Index universe into quintiles based on ESG momentum score and review the historical performance. We found meaningful outperformance of the top-quintile for ESG momentum vs. the bottom quintile over the long term. And while the metric has dulled somewhat in recent months, the long-term value of the measurement was still quite apparent.

Style and substance

We then looked at the correlation of ESG momentum to traditional style factors, and found it was negatively correlated with almost all of them. This tells us that ESG momentum may have the potential to increase portfolio diversification and could be a useful financial indicator for portfolio construction.