A look at Environmental, Social and Governance (ESG) investing has sparked debate for years: can it deliver meaningful financial returns while addressing pressing global challenges? And is it reshaping financial strategies - or simply reframing old ideas in new terms?
Does ESG investing go beyond renewable energy or clean technology? A common misconception is that it doesn't. But this misunderstanding can limit how investors perceive the potential of ESG strategies to deliver both financial returns and long-term value. While these industries play an important role, ESG covers a much broader spectrum of issues. From governance structures to supply chain transparency to workforce engagement, ESG factors help evaluate how companies in all industries manage risks and opportunities.
This view has helped ESG strategies to deliver measurable financial value. MSCI ACWI SRI, the All Country World socially responsible investing index which selects the top 25 % of companies globally by ESG performance, has outperformed its parent MSCI index over the past ten years generating an annualized 0.9 % return advantage. While past performance doesn't guarantee future returns, identifying companies that excel at long-term planning and operational strength fuelled past success.
Social factors increasingly reflect shifting societal expectations.
So, can the MSCI ACWI SRI Index's decade-long outperformance provide evidence of ESG's financial benefits? While annual results vary, recent MSCI research on this topic indicates that the answer is, yes. On closer scrutiny, we can see these results reflect the tangible benefits of investing in companies with strong corporate governance that excel at long-term strategic planning, mitigating risks and managing their resources more efficiently.
MSCI research indicates that the importance of various ESG factors changes over time. From 2013 to 2020, environmental and governance factors were the dominant drivers of returns, reflecting the growing focus on climate risk and corporate accountability. More recently, social considerations - like workforce diversity, employee well-being and community impact - have gained prominence, mirroring evolving societal expectations.
The broad nature of ESG assessments offers investors a way to align their portfolios with both market trends and long-term resilience.
The rise of ESG investing has sparked debate over the question: Is ESG a unique financial factor, or does it simply overlap with traditional metrics like quality or momentum? MSCI's research shows that ESG is a distinct financial factor that reflects both corporate resilience and long-term growth potential.
Thinking, managing, and investing sustainably are integral parts of our DNA. Our owner, the Princely Family of Liechtenstein, recognized early on how important sustainability is for our environment, society, and future. As a family-run private bank, we are committed to the Paris Climate Agreement, the United Nations Sustainable Development Goals, and a sustainable financial sector.
By integrating ESG data into their strategies, investors can better identify companies that can effectively manage risks and identify opportunities, even in uncertain markets. ESG's distinct characteristics can play a key role in portfolio construction.
Some sceptics suggest that ESG's outperformance reflects little more than increased capital flows into sustainable funds. However, MSCI's data shows that the financial strength of ESG-aligned companies is rooted in robust fundamentals. These firms consistently deliver higher dividend yields and exhibit lower earnings volatility compared to their peers. Over the past decade, the yield gap between high- and low-ESG performers has widened significantly, underscoring the operational efficiency and financial stability of ESG-aligned companies.
ESG-aligned companies also frequently exhibit transparency and accountability, traits that attract investors and reduce regulatory and reputational risks. Yet as ESG investing grows, so too does the risk of greenwashing, raising crucial questions about the credibility of sustainability claims.
This growing risk not only undermines investor confidence but also jeopardizes the integrity of ESG as a framework for meaningful impact. Ensuring credibility requires rigorous standards and transparent methodologies. MSCI's evidence-driven approach provides a model for evaluating ESG performance, avoiding overstatement while delivering real insights into corporate impact.
This focus on accountability for values-driven investors as well as for regulators whose scrutiny over potential greenwashing continues to grow.
ESG's greatest strength lies in its ability to combine financial returns with potential societal and environmental benefits. It allows investors to support sustainable and ethical practices while seeking competitive performance - a dual benefit that aligns closely with LGT Private Banking's investment philosophy.
While sceptics remain, the financial world continues to embrace sustainability. The case for ESG is no longer about choosing between doing good and doing well. MSCI's research demonstrates that ESG offers investors an opportunity to seek strong returns while working toward sustainability goals in today's interconnected markets.
Sustainability is part of our DNA and guides us in everything we do. Our owner, the Princely Family of Liechtenstein, has always been committed to ensuring that future generations are given the best possible conditions in which to thrive. As one of the leading sustainable investing companies, LGT embraces this principle across all of its activities, and offers a broad range of sustainable investing solutions.
