MSCI ESG Indexes Outperform During Covid-19 Pandemic in Q1 2020

In light of all the economic fallout from the coronavirus pandemic, stocks and ETFs are struggling to perform, as much of the world remains under quarantine or stay-at-home orders, in an event that is likely to have unprecedented economic and health repercussions for years to come.

Although the current conditions have only existed for a few months, MSCI observed a positive performance contribution from ESG across four select MSCI ESG indexes and across some regions during Q1 2020.

ESG (Environmental, Social and Governance) is a class of investing that is also referred to as “sustainable investing.” This is a catch-all term for investments that strive for positive returns as well as a long-term impact on society, environment and the performance of the business. There are several different categories of sustainable investing, including impact investing, socially responsible investing (SRI), and ESG and values-based investing.

Many investors, like Millennials, are not only interested in the financial outcomes of investments, but also in the impact of their investments and the role their assets can have in promoting global issues such as climate action.

“We observed a positive performance contribution from ESG across four select MSCI ESG indexes (representing tilt, optimization and best-in-class selection approaches) and across some regions during Q1 2020. These results were consistent with longer-term performance. As the coronavirus pandemic continues to test markets, we will continue to monitor how these ESG indexes perform,” MSCI analysts explained.

The MSCI ESG Indexes that performed well included the MSCI ACWI ESG Universal, the MSCI ACWI ESG Leaders, the MSCI ACWI ESG Focus and the MSCI ACWI ESG SRI.

“The outperformance of our four ESG indexes in global markets during the crisis was attributable mainly to equity style tilts. ESG was the strongest contributor, followed by tilts toward lower beta, lower volatility, and better quality. Over the past five years, the ESG factor provided less significant though still relatively high levels of contribution. The methodology used to construct the MSCI ESG Leaders, ESG Focus and SRI indexes aim to reduce differences from the parent index in sector exposures. This methodology helped reduce the contribution from industry factors (sectors include numerous industries),” said the firm.

“The positive contribution from the ESG factor, though over a limited period, supports our previous research where we found certain high ESG-rated companies were less exposed to systematic risks such as exogenous shocks. The coronavirus crisis is a recent example of such a shock,” the firm added.

“Ultimately, the better relative performance of sustainable funds in the first quarter derives mainly from their investment process and security selection, which focuses on companies or countries that have stronger ESG profiles,” wrote Benjamin Joseph, CAIA, a manager research analyst for Morningstar in a recent note. “Sustainable ETFs in our list, which for the most part screen the investment universe based on MSCI ESG scores, have done well over 2020’s first quarter relative to their category peers.”

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