“Unprecedented, disruptive, game-changing” — these are commonly heard words describing the COVID-19 pandemic and the shock it is creating for businesses, economies and governments, testing the fabric of our society and culture. Undoubtedly, this may mean significant changes for the world and the way we do business and interact with each other for the foreseeable future.
The silver lining is that the effects of this disruption should accelerate the analysis of potential future system shocks, differentiating companies that build resiliency across their entire value chain and those that do not. Responsible investing (RI) and environmental, social and governance (ESG) analysis has been evaluating and evolving systems approaches and studying resilience for some time. The value of ESG analysis is becoming increasingly clear.
We believe there is no better short-term evidence of this value than the performance of RI indices and investment strategies during this and the 2008 financial crisis. The sector-neutral MSCI ACWI ESG Leaders Index, for example, has outperformed the broad ACWI Index especially through the most recent market downturn in February and March of 2020 (Figure 1). We do note that style factors have a significant role to play in performance (in fact, the Momentum index outperformed the ACWI the most over Q1 2020, in addition to quality, growth, and minimum volatility indices).[i] In the case of the MSCI ACWI ESG index, the largest factor contribution was pure ESG followed by quality, volatility and momentum according to MSCI.[ii]
Figure 1. Outperformance of MSCI ACWI ESG Leaders Index versus MSCI ACWI
[i] Source: Datastream; MSCI ACWI style performances in USD for Q1 2020
[ii] MSCI, MSCI ESG Resilience presentation, April 7 2020