MSCI ESG Ratings in Global Equity Markets: A Long-Term Performance Review

In this paper, we review the financial performance of MSCI ESG Ratings in global (MSCI ACWI Index) and developed (MSCI World Index) markets over the course of their history of 11 and 17 years, respectively.

A key difference between MSCI ESG Ratings and traditional market-risk factors such as value or momentum is the fact that MSCI ESG Ratings assess corporate risk rather than market risk. Our study was therefore based on both a fundamental performance assessment (how differences in ESG ratings were associated with differences in earnings and profitability) and a stock-price performance assessment. This is important to understand to what extent (if observed) better corporate-earnings fundamentals were transmitted into better market performance, which we called the “transmission channel.”

Using a standard quintile analysis on MSCI ESG scores (controlled for sectors, regions and company size), we found that companies with higher MSCI ESG Ratings outperformed their lower-rated counterparts across both the MSCI ACWI Index and the MSCI World Index over the study periods.

Transmission channels of how ESG may affect financial performance and risk

Source: MSCI ESG Research