What matters more? The E, the S, or the G (data from MSCI)

This week I want to flag a report from MSCI ESG Research which tries to assess whether the E, the S, or the G in ESG contribute more to risk and return.

The report first studies the impact of E, S, and G scores on financial valuations. Then it studies whether the individual ESG Key Issue scores (which are the basis of MSCI’s ESG Ratings) have affected this over different time periods or different markets. Finally, it discusses differences by sector and by different approaches to weight the E, the S, and the G.

The Top 10 findings from this study to us are:

1. G is more important than E or S over short periods of time in terms of profitability and risks.
2. E and S were more important over a longer period.
3. G was particularly important for Financials and Consumer Discretionary companies.
4. E was most important for Materials and Energy companies.
5. S was most important for Consumer Discretionary companies.
6. Equal weighted E-S-G scores were less effective than G score alone over the studied period, but a backward-looking optimized weighting scheme is better (of course backward-looking optimizations aren’t that useful for investors who are inherently forward-looking).
7. ESG ratings, E ratings, S ratings, and G ratings all delivered outperformance between the top quintile stocks and the bottom quintile stocks in the studied period. ESG had the biggest spread, then G, and E & S were pretty similar at third place.
8. Within E’s key factors, the one that produces the biggest outperformance between the top and the bottom quintiles is carbon emissions (almost 35% cumulative outperformance).
9. Within S’s key factors, the one that produces the biggest outperformance between the top and the bottom quintiles is health & safety (~30% cumulative outperformance), followed by labor management (~25% cumulative outperformance).
10. Within G’s key factors, the one that produces the biggest outperformance between the top and the bottom quintiles is corruption (almost 25% cumulative outperformance).

Mexico is newer to the ESG world than other more developed countries. For that reason, there is not enough data to carry out an analysis with statistical significance equivalent to the one MSCI did for its whole coverage universe. But if we were to assume this data holds steady across times, and across geographies, this study does provide a map for both companies who are starting their ESG journey as well as investors who are trying to integrate ESG factors in their investment process (showing which factors maybe are worth figuring out first).

I hope you found this useful. As usual, if there is anything we can help you with, please reach out.

Best,

Marimar

Partner, Miranda ESG