This report studies the performance of environmental, social, and governance (ESG) factors across industry sectors, time horizons, and weightings. The research concluded that a balanced, industry-specific weighting of ESG indicators is effective in the long term and achieves better relevance than individual pillar indicators. Governance factors related to event risks such as fraud showed significance in the short run, whereas environmental and social issues became more important in the long run due to erosion risks.

Investment managers using ESG scores in their portfolio construction must understand the most influential criteria’s relative importance that reflect firm performance to capture the underlying ESG issues that may affect financial performance. The report recommends that investors utilise industry-specific weighting of ESG issues to integrate ESG factors into stock selection and portfolio construction effectively.  It’s suggested to watch out for longer-term trends like human capital management and carbon emissions, which may result in eroding a company’s business continually. The data analysed for the study pertains to the MSCI World Index, which contained around 1,600 large- and mid-cap developed-market stocks.

The report aims to evaluate the relevance of key ESG issues and their pillars regarding risk and return using an extensive analysis of market performance. The report compares and examines the performance and weighting of each pillar and key ESG indicator as well as its relevance. The authors used data from December 2006 to December 2019.

In the short term, governance indicators are the most significant pillar because they tend to materialise as events that immediately impact stock prices. The study suggests that investors must consider the testing and standardising of ESG screening processes that are being used on the investment horizon. In the long term, environmental and social indicators are more important because issues like carbon emissions tend to be more cumulative and lead to erosion risks affecting long-term performance.

The performance of the E, S, and G scores with regards to stock pricing was analysed for the entire 13-years, and the total ESG score outperformed each individual pillar score and is shown to be less cyclical.

Overall, integrating ESG factors into the investment process can result in better risk- adjusted investment returns. However, investors must carefully assess which ESG factors provide the most significant returns for various industries. The study supports further research into refining the selection of ESG factors and indices to develop more efficient ESG investing.

It’s suggested that companies use carbon emissions, water stress, toxic emissions, waste, labour management, health and safety, human capital development, privacy and data security, corporate governance, business ethics, corruption and instability, and anticompetitive practices to calculate their ESG rating. Companies must use industry-specific weighting schemes to combine ESG key issues into more relevant ESG scores for their individual sector and discern whether the short-term or long-term focus is more important.