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Stock indexes fell in the first quarter. But how have the ESG indices fared and what about the long term?

The ESG indices faced many challenges in the first quarter of 2022. To see how the ESG environment works in the first quarter of 2022, we selected three ESG indices that we compared to the MSCI World indices:

  1. The MSCI ESG Leader Index, which tracks companies with the best ESG performance in each sector,
  2. The MSCI World SRI Index, which is accompanied by strict inclusion rules based on ESG principles,
  3. MSCI World Climate Paris Aligned Index (PAB), aligned with global warming scenarios up to 1.5°C.

This comparison shows that all ESG indices underperformed the benchmark index.

Performance of stock indices in the first quarter of 2022

Source: Bank J. Safra Sarasin, MSCI, Bloomberg. 31.03.2022

A negative correlation between ESG scores and performance in the first quarter?

To test this hypothesis, we ranked all the stocks in the MSCI World Index based on our JSS ESG industry ranking and ranked them in four categories, from first to fourth. We weighted these four sectors (P1 to P4) by market capitalization and calculated their environmental performance. The results confirm that companies with the highest ESG ratings suffered in the first quarter of 2022.

Annual performance (%) Q1 2022

Source: Bank J. Safra Sarasin, Bloomberg, MSCI, MSCI ESG Research, 31.03.2022

To further our analysis, we compared the performance of the MSCI World Index and the ESG Leader Index, and found a significant difference: Energy and Materials stocks in the ESG Leaders Index did not perform very well. even rising to 9.8% when looking at sectors like fossil fuels. Therefore, one of the main reasons for the underperformance of the ESG index is the amount of oil that is accessed by fossil fuels.

The long-term outlook for ESG stocks remains positive

To better understand the long-term trends, we repeated the analysis of the distribution of the MSCI World index according to our JSS ESG corporate framework, this time moving back to December 31, 2018. The results show a different relationship: very high. the higher the company’s ESG rating, the better the performance.

Annual performance (%) 31.12.2018 – 31.03.2022

Source: Bank J. Safra Sarasin, Bloomberg, MSCI, MSCI ESG Research, 31.03.2022

Finally, we have included in our analysis risk-weighted relative to historical volatility. The extended period up to November 30, 2013 (the announcement date of the MSCI World PAB index) shows that ESG indices have better risk/return ratios compared to a fixed index with a better return for the same level of risk, or a lower risk of the same rate of return, or both.

So, while the first quarter of 2022 was full of challenges, our conclusion is that in the long term, the story of ESG investment is encouraging.

The risk/reward ratio has tilted in favor of ESG indices since 30.11.2013

Source: Bank J. Safra Sarasin, MSCI, 31.03.2022

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