Illuminating the Relationship Between ESG and Performance

Time horizons are key to understanding the impact of environmental, social and governance (ESG) on stock returns. This paper, which was published in Investments & Wealth Monitor, illustrates the relative importance of short-term event-related risks (such as fraud, corruption or accidents) versus longer-term erosion risks (such as carbon emissions) over time. It also examines the relationship between ESG risks and specific issues that are used in calculating a company’s ESG rating.

For example, short-term event-driven risks, such as fraud or corruption, are frequently tied to the G pillar. Others, such as accidents, strikes or oil spills, may be tied to E and S scores. In contrast, erosion risk represents long-term risk, often reflecting environmental and social issues’ contributions to stock-price performance.

Event risk vs. erosion risk of 11 MSCI ESG Key Issues

This exhibit compares the performance of the equal-weighted top quintile (Q1=worst ESG characteristics) minus bottom quintile (Q5=best ESG characteristics) stock-specific returns. Source: MSCI ESG Research, based on the 15-year period ended Dec. 31, 2021