Data compiled by Arabesque S-Ray show companies that score high in Arabesque's proprietary ESG rating algorithm outperform lower scoring peers, particularly among large-cap European firms and small-cap U.S. firms. On a market-cap-weighted basis, companies in the top quintile of ESG scores outperformed the bottom quintile across European companies in each year since 2014, as well as the first seven months of 2018. In a market-cap-weighted index, larger firms have a greater impact on performance than in an equal-weighted index. This can be observed when comparing the market-cap-weighted composite returns vs. the equal-weighted composite where the return difference between the top and bottom quintiles of the European data set is more muted.
Conversely, the opposite can be seen in the U.S. data set, where the equal-weighted composite return differences are positive relative to the market-cap-weighted counterpart.
A deeper look at the outperformance of the top quintile shows that higher ESG rated companies offer better downside protection than lower rated companies. In down markets, the top quintile across the three data sets captured on average 93% of the market return while the bottom quintile captured on average 123% of the market return. While the opposite can't be said for up markets, the spread between the two is more compressed. The top quintile gathered around 98% of the market upside with the bottom quintile taking an average 109% of the upside.
S-Ray is a data tool developed by Arabesque, an asset management firm. It provides ESG ratings using internal quant models that cover about 7,000 companies globally according to their sustainability and corporate citizenship, among other factors, to rank companies in a portfolio.