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19 Jun 2019

The impact of ESG momentum on valuations

Mobilising the world’s wealth for positive social and environmental goals is an increasingly popular idea, from boardroom, to coffee shop, to newspaper column.

Sustainable investing has gained attention since the global financial crisis of 2008-2009 demonstrated to millions of people the power of capital markets. Nowadays, it’s a broad church, attracting institutions analysing new risk factors – such as corporate governance and board diversity – as well as individuals simply looking to make a positive change with their money. 

For all its potential benefits, one question still often comes up when sustainable investing is discussed, particularly among professionals charged with delivering optimal risk-adjusted return:

“Does sustainable investing help or hurt performance?”

New research from indexing giant MSCI looked into this question and came up with some interesting results.

The ESG question: correlation or causation?

In its research paper How markets price ESG,1 MSCI tried to establish whether changes in a company’s environmental, social and governance (ESG) profile drive changes in its share price.

An ESG profile includes factors such as a company’s corporate governance, ownership structure, tax transparency, carbon footprint and gender diversity – “all [the] characteristics that investors may look at when doing a financial analysis of a company”.

Why ask this question? MSCI researchers found over 2,000 studies on ESG, and a lively debate in academic and professional circles about its potential financial benefits. But they did not find any consensus on the answer.

Therefore, they decided to examine the underlying economic questions. If they could not find a link, any correlation between ESG scores and share-price movement might just be a coincidence.

The researchers recognised immediately that many factors influence share-price movement. Companies with high ESG scores would often have strong balance sheets, loyal employees and less exposure to risk. It could be these factors, not ESG scores, that accounted for any outperformance.

So, the researchers built a model, looking at year-on-year changes in a company’s ESG profile (which they called ‘ESG momentum’), which also controlled for other factors that might affect the results.

Read the full results or check out the first conclusion below.

ESG momentum seemed to predict share-price growth

One of MSCI’s conclusions from this research is seen in the chart below. It shows the historic performance of top-quintile companies as measured by ESG momentum relative to bottom-quintile companies, across developed and emerging markets.

What we can see is that companies with positive ESG momentum outperformed companies with negative ESG momentum, going back nearly a decade.


Performance of top versus bottom ESG momentum quintile portfolios2

esg chart

Read our insight for a full analysis of the other results

Find out more about our ESG Leaders range

1Study may be found online at: https://www.msci.com/www/research-paper/how-markets-price-esg-have/01159646451.

2Source: MSCI, “How Markets Price ESG”, Nov 2018, Giese, Nagy. Data covers two hypothetical long-short indexed portfolios. Developed market performance represents going long for the equal-weighted upper quintile of MSCI World Index, while the bottom equal-weighted quintile goes short. DM data is from June 2009 to February 2018. The emerging-market hypothetical portfolio applies the same methodology to the MSCI Emerging Markets Index, from June 2013 to February 2018, as older data was unavailable. Past results are not a reliable indicator of future results.

Risk Warning​

This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to client-services-etf@lyxor.com.

Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

Research disclaimer

This material reflects the views and opinions of the individual authors (Guido Giese, Zoltan Nagy) as at November 2018 and in no way the official position or advices of any kind of these authors or of Lyxor International Asset Management and thus does not engage the responsibility of Lyxor International Asset Management nor of any of its officers or employees. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research.

Conflicts of interest 

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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