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The Answer to ESG’s Biggest Question?

Correlation or causation? New research sheds light on whether sustainable investing helps or hurts performance.

For all its potential benefits, one question still 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 MSCI attempted to establish whether changes in a company’s ESG profile drive changes in its share price. The researchers found over 2,000 studies on ESG, and 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.

Rising to the challenge, the MSCI 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. They found that – in both developed and emerging markets – companies with positive ESG momentum outperformed companies with negative ESG momentum, going back nearly a decade.

Read a full analysis on the impact of ESG momentum on valuations.


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Lyxor Research disclaimer

This material is based on an MSCI report by Guido Giese and Zoltan Nagy as at November 2018 and is 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.

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