Introduction

MSCI ESG Ratings are designed to measure companies’ exposure to and management of financially material risks and opportunities affecting earnings and valuations. These ratings have been in place since 2007 for developed markets (MSCI World Index) and since 2013 for global markets (MSCI ACWI Index). The report examines their impact on fundamental performance, stock-price performance and risk characteristics. It also reviews the performance of MSCI ESG indexes. The study assesses transmission channels from ESG characteristics to corporate earnings and market performance.

MSCI ESG Ratings and stock-price performance

A quintile analysis of industry-, size- and region-adjusted ESG scores across the MSCI ACWI Index from 2012 to 2023 showed companies with higher MSCI ESG Ratings consistently outperformed those with lower ratings. The aggregated total ESG score demonstrated stronger and less volatile outperformance than individual environmental, social or governance pillars. Results were consistent across North America, Europe, Pacific and emerging markets. Importantly, this outperformance could not be explained by traditional equity style factors, confirming a distinct ESG performance effect.

MSCI ESG Ratings’ performance across sectors

Sector-level analysis revealed that higher-rated companies outperformed in eight of 11 sectors. Consumer staples showed flat performance, while energy and real estate saw slight underperformance. In carbon-intensive sectors, materials and utilities showed clear outperformance for highly rated companies, while energy lagged. In developed markets, high-rated firms in carbon-intensive sectors outperformed, whereas in emerging markets they underperformed. This divergence may be linked to differing policy and market conditions, particularly in coal use and renewable transitions.

MSCI ESG Ratings’ performance in developed markets

Extending the analysis back to 2007 in developed markets, the results mirrored global findings. Over 17 years, higher-rated companies consistently outperformed lower-rated peers, though with variation across years. Some periods, such as 2016, 2021 and 2022, showed strong outperformance, while 2010, 2011 and 2023 showed underperformance.

MSCI ESG Ratings’ performance during times of crisis

The report examined two major crises: the COVID-19 pandemic in 2020 and the Russia-Ukraine war in 2022. In both cases, exposure to companies with higher MSCI ESG Ratings added financial performance after controlling for other factors. The ESG factor return in 2020 was higher than in any other year of the study period, while in 2022 the effect remained positive but below the long-term average.

Performance of MSCI ESG indexes

MSCI ESG Ratings are used to construct a range of MSCI ESG indexes, including ESG Leaders, SRI, Universal and Focus variants. From 2013 to 2023, all standard MSCI ESG indexes outperformed their MSCI ACWI parent index, though the degree of outperformance varied. Attribution analysis showed returns were partly due to ESG factors and partly to other style and industry exposures. Regional analysis found ESG indexes in all subregions delivered positive contributions from ratings, though some, such as the MSCI North America ESG Leaders and MSCI Pacific SRI Indexes, underperformed slightly due to other exposures. Outperformance was especially strong during the COVID-19 crisis.

Conclusion

Over 11 years in global markets and 17 years in developed markets, companies with higher MSCI ESG Ratings have shown stronger financial performance than lower-rated peers. This outperformance was driven by stronger earnings growth and higher dividend yields rather than valuation effects. Positive contributions were observed during crises and across most sectors and regions. MSCI ESG indexes generally outperformed their benchmarks, further confirming the financial relevance of ESG ratings in equity markets.