MSCI has some answers to commonly asked questions about ESG ratings, including how those ESG ratings are constructed, and which factors are the most important.
In a paper released Monday, "Deconstructing ESG Ratings Performance," MSCI researchers looked how each topic — environmental, social and governance — has an impact on financial valuations, and how those effects change over time by sector and among types of equity.
Based on overall MSCI ESG scores, the companies in the top quintiles showed higher profitability and lower levels of idiosyncratic and stock-specific risk than the bottom quintile.
Governance indicators had the most financial significance, and the telecom, materials and energy sectors showed the most significant results. Governance-related risks immediately impacted stock prices, while environmental or social indicators developed slowly but showed long-lasting financial effects, the paper said.
MSCI researchers also found that when looking at financial performance over longer periods, the MSCI ESG rating based on a more balanced and industry-specific weighting showed better long-term relevance than the individual pillar indicators.