...excellent and brief blog on the alpha (excess return) impact of investment exclusions, performance benchmark provider MSCI released their year-end ESG Index Report (linked below), and in it compared the 3 and 5 year returns and 3 year risk of their various ESG indices with a “standard” non-ESG index. Meaningful differences? …
As shown in the above table – not really, except in one instance, and the most extreme ESG screened index outperformed all over the last 3 and 5 years - more next...
The 3 and 5 year performance on their standard and “ESG Screened” benchmark was nil to 10 basis points, while the 3 year risk – volatility – was also just 10 basis points. This is well within likely fee differentials between index funds managed against each benchmark! A more significant difference is seen between the standard and “SRI Index”, the latter representing just “the top 25% of companies in each sector [of the index] according to their MSCI ESG Ratings" – the best of the best. Note the SRI index is more concentrated, at just 541 constituents relative to the near 3,000 constituents in the “standard” index. Overall, the SRI index had a 3.7% 3 year tracking error versus standard – a fairly sizable number, but not surprising given just the constituency counts.
So is there a difference? The more and more exclusive the ESG screen the greater the performance and risk differences. Important to note that directionally the SRI index outperformed the standard index by 140 and 180 bps over the last 3 and 5 years respectively.