ESG and Global Investor
Returns Study
September 2023

1

Table of Contents
Introduction ................................................................................................................................................3
Background ................................................................................................................................................6
ESG and Related Terminology .............................................................................................................. 6
A Brief History ............................................................................................................................................ 9
Overview of ESG Investing and Future Trends .............................................................................. 14
Is Investment in Sustainability Material? ......................................................................................... 14
Financial Reporting and Regulatory Trends .................................................................................. 15
Rise in Regulatory Enforcement and Litigation ............................................................................ 21
Need for Attestation Will Increase ................................................................................................... 21
What does this mean for Investors and Other Stakeholders? ................................................. 22
Academic Research and Sustainability ............................................................................................ 25
Corporate Manager View..................................................................................................................... 26
For the Asset Manager ......................................................................................................................... 30
ESG and Global Investment Returns Study Results ...................................................................... 34
Methodology Overview ........................................................................................................................ 34
Study Results – Highlights .................................................................................................................. 40
Global Results by Rating and Industry ............................................................................................ 43
Highlights by Geographic Region ..................................................................................................... 50
Future Research ..................................................................................................................................... 57
Appendix 1: Study Methodology ....................................................................................................... 59
Appendix 2: Countries/Markets Included in the Study ................................................................. 99
References ............................................................................................................................................. 100
Abbreviations........................................................................................................................................ 102
Acknowledgments ............................................................................................................................... 103
Kroll’s ESG Advisory and Technology Solutions .......................................................................... 104

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ESG and Global Investor Returns Study

Introduction
Kroll is pleased to present our inaugural ESG and Global Investor Returns Study1,2 Our study examines,
globally, the relationship between historical returns of publicly traded companies and their ESG ratings.
Our goal was to determine whether companies with better ESG ratings outperform those with worse
ratings.
As the relevance of ESG investing has increased for individual investors, asset managers, corporations,
regulators and other stakeholders, so has the confusion and lack of clarity about the role of ESG in
evaluating investment decisions. The cost of undertaking such strategies, or simply the disagreement with
ESG principles, had led to a politization of ESG investing. Yet, ESG investing is simply trying to consider
risks and opportunities that may arise from various environmental, social or governance trends. Investors
look at all kinds of risks and opportunities as part of their investment decision-making, with ESG factors
being just another facet of that evaluation process. Based on global regulatory and financial reporting
developments and investment allocation trends, ESG investing is likely to remain an important driver ofinvestment decisions.
To address many of the questions raised by ESG investing, we believe a natural starting point is aquantitative approach that compares stock market return data with ESG company ratings. This allows us
to determine whether a relationship exists between ESG ratings and company returns. Our study relies on
ESG company ratings published by MSCI.3

Our study shows that companies with better ESG ratings generally
outperformed those with lower ratings over the 2013-2021 period.
We examined over 13,000 companies across a variety of geographies and industries around the globe.
We investigated the relationship between a company’s total stock returns (dividends plus capital
appreciation) and its MSCI ESG rating over the 2013−2021 period. Specifically, we built investment
portfolios comprised of companies rated under each of MSCI’s seven individual ESG rating categories(AAA, AA, A, BBB, BB, B and CCC) and aggregate ratings (Leaders, Average and Laggards) to examine
whether an investment strategy focused on companies with better ratings would result in a superior return
performance.
Our study is unique due to its
comprehensive nature: we examine
the correlation between company
ESG ratings and returns for four
geographic regions (World, North
America, Western Europe andAsia) and 12 countries/markets

1
2

3

ESG stands for environmental, social, and governance.
ESG investing is the consideration of environmental, social, and governance factors alongside financial factors in the investment
decision-making process. See, for example: https://www.msci.com/esg-101-what-is-esg.
MSCI Inc. is the world’s leading provider of ESG company ratings.

3

ESG and Global Investor Returns Study(Australia, Brazil, Canada, China, France, Germany, Hong Kong Special Administrative Region of thePeople’s Republic of China (Hong Kong SAR), India, Japan, South Korea, the United Kingdom (UK) and theU.S.). In addition, within some of these geographies, we further scrutinize the results for 11 industries (asdefined by the Global Industry Classification Standard (GICS®) structure): Energy, Materials, Industrials,
Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology,
Communications Services, Utilities and Real Estate.4
The idea behind ESG investing is that if significant capital flows into companies that are considered “good”
ESG citizens, they should be able to raise capital at a lower cost (when compared to “bad” ESG citizens).5
From an investor perspective, a lower cost of capital means that investors should expect lower returns
from good ESG companies. In practice, however, expected returns do not always equal realized returns.
Key Insights:
Globally, ESG Leaders earned an average annual return of 12.9%, compared to an
average 8.6% annual return earned by Laggard companies. This represents anapproximately 50% premium in terms of relative performance by top-rated ESG
companies.
In the United States, the country with the largest number of rated companies, the ESG
Leaders earned an average annual return of 20.3%, compared to a 13.9% averageannual return earned by Laggard companies. Similar to the findings globally, therelative performance by top-rated ESG companies was nearly 50% stronger than theirlower-rated counterparts.
The positive relative performance of ESG Leaders vs. Laggards was generally
consistent across all major geographic regions and for most industries, with some
exceptions.
European companies are further along in their ESG journey, according to MSCI. For
example, in December 2021, nearly a third of Western European companies wererated as ESG Leaders. In contrast, only 10% of North America and 6% of Asia
companies had a Leader rating.
Globally, Leaders outperformed Laggards in all industries analyzed, except for
Consumer Staples and Health Care. This contradicts the claim by some market
analysts that the outperformance of ESG investments (when present) is attributable
to the overweighting of Information Technology stocks.

45

The Kroll ESG and Global Investment Returns Study relies upon the GICS® structure as of the end of calendar year 2021 forindustry classification purposesEffective March 17, 2023 (after market close), some subindustry groups were reclassified from
Information Technology to Financials. Our study does not incorporate these most recent GICS® changes.
To be clear, the ESG ratings issued by MSCI and other mainstream ratings providers do not measure a company’s impact on theenvironment or society, but rather how material ESG factors can affect its financial performance.

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ESG and Global Investor Returns Study

Global Performance of ESG Ratings Portfolios: Cumulative Return in 2013-2021 Horizon($1 Invested in December 2012)$3.50

World (Leader)World (Average)

World (Laggard)

$3.00

$2.99

$2.50

$2.53

$2.11

$2.00

$1.50

$1.00

$0.50

$0.00

Our study findings can help companies, investors, asset managers, regulators, and other interested
stakeholders when considering investments and ESG initiatives across geographies and industries, orwhen developing ESG policies and deciding on appropriate ESG-related disclosures.
Kroll continues to watch this space. Knowing that more scrutiny is being placed on what constitutes an
ESG-focused investment, capital allocations may change the relationship observed in our study. In future
research, we will investigate if these historical relationships between ESG ratings and returns can be used
to adjust a company’s forward-looking cost of capital estimates.
Thank you for reviewing the results of our study. If you have any questions, feel free to reach out to our
Kroll team.

Carla Nunes, CFA, ABVManaging Director
Global Leader of Valuation Digital
Services group+1 215 430 6149
carla.nunes@kroll.com

Julianne Recine
Managing Director
Head of Global ESG Advisory Services+1 212 871 7524
julianne.recine@kroll.com

5ESG and Global Investor Returns Study

Background
ESG and Related Terminology6
Climate and broader ESG-related issues are increasingly prominent considerations for investors andregulators. Many questions have arisen about what qualifies an initiative or an investment to be labeled
as climate, ESG-, or sustainability-focused. Accusations of “greenwashing” have increased significantly
in recent years.
Part of the issue is the lack of consistency and standardization for what these terms mean. Exhibit 1
highlights some of the terminology used in ESG investing. Some of these terms are often usedinterchangeably, but they do not always mean the same thing. Lines may also become more blurred as
regulators begin introducing mandatory disclosure requirements for sustainability.
Exhibit 1: Flavors of “Sustainable” Investing – Terminology Background

Socially Responsible Investing (SRI)•

Began in the 1960s, although it traces its roots back to the 18th century.

•

Gained traction in the 1980s when many mutual funds were founded to cater to the concerns ofsocially responsible investors.

•

Typically used in the context of public (listed) companies.

•

Investing strategy that entails screening investments to exclude businesses that conflict with theinvestor’s values (sometimes called “ethical investing”).

•

Original “sin stocks” subject to exclusion included alcohol, tobacco, weapons and gambling.

•

In recent times, the selection may be based on a wider range of social and environmental criteria (e.g.,
no “fossil fuel” stocks), and may include positive screening.

ESG Investing•

ESG term coined in 2004.

•

Emerged as a joint effort by the United Nations (UN) Global Compact and the Swiss Government, laterjoined by the International Finance Corporation (IFC).

•

ESG is an investment framework. In their decision-making, market participants consider the ways inwhich ESG risks and opportunities can have a material impact on a company’s financial performance,
both positive and negative.

6

For the various sources used to summarize this section, consult the References section at the end of this report.

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ESG and Global Investor Returns Study

Climate/ Environmental Investing••••

Gained the most traction in recent years, as reports of climate change and global warming have become
mainstream.
Climate is a narrower concept than environmental issues (e.g., natural resources, biodiversity), but the terms
are often used interchangeably.
Climate investing is a style of thematic investing. Thematic investment is a diversification tool that seeks todeliver long-term value through future trends in themes such as technology, climate, energy or health care.
Environment is one pillar in ESG, but often gets the most attention. It is often confused with ESG, eventhough ESG is the broader concept. Even academics sometimes claim they are researching ESG investing,even when using only environmental data or related concepts in their research papers, labeling companies“green” or “brown” based on their environmental credentials.

Impact Investing
•
•
•
•
•

Coined in 2007 when the Rockefeller Foundation and other private investors got together.
Led to the creation of the Global Impact Investing Network (GIIN).
Originally used in the context of private investments, but it is expanding to public companies.
Impact investments are those made with the intention of generating positive, measurable social andenvironmental impact alongside a financial return.
Impact funds report not just on their financial performance (returns), but also on quantifiable metrics thatgenerate a positive environmental and/or social impact (e.g., how many schools were built in a specificgeographic area).

Sustainable Investing•Has become a “catch-all” for a company’s efforts to “do better” or “do good.”•

Based on three pillars of sustainability: economic growth, environmental protection and social progress.

•

Also referred to as “people, planet, and profits” or “people, planet, and prosperity” (aka the “Three ‘Ps’ of
Sustainability” or the “Triple Bottom Line”).

•

The UN created its Sustainable Development Goals (UN SDG) in 2015 with this Triple Bottom Line in mind.

•

The perspective taken is different from ESG investing. Sustainable investing focuses on how a company (oran investment) impacts the world. A sustainable portfolio is about intentionally including companies thatare making a “positive” difference in the world.

•

Sustainable investing is a broader concept than other investment styles and includes SRI andclimate/environmental (although the terms are often used interchangeably).

•

Sustainable investing is synonymous with “values-based investing.” Values-based investing is aninvestment approach that reflects an investor’s personal values by avoiding or increasing exposure to
specific companies, industries or business practices. It encompasses SRI, ESG and certain thematic andimpact investing.7

7

Not to be confused with “value” investing, an investment style usually contrasted with “growth” investing. Value and growthrisk factors were first introduced by the seminal work of Nobel Prize in Economics laureate Eugene Fama and his co-author
Kenneth French. These academics showed that expected stock returns could be explained not just by a stock’s exposure to“market” risk but also “value” and “size”. See Fama, Eugene F., and Kenneth R. French. “The Cross-Section of Expected Stock
Returns.” The Journal of Finance, 47, no. 2 (1992): 427–65. https://doi.org/10.2307/2329112.

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ESG and Global Investor Returns Study

A Brief History

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ESG and Global Investor Returns Study

A Brief History
SRI was a precursor to modern ESG investing in the U.S. and can be traced back to the early 18th
century. At the time, Methodists in America protested investing in companies that had interests in the
manufacturing of liquor or tobacco products or condoned gambling. In the mid-18th century, theQuaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade. Ethicalinvesting outside of the U.S. can be traced back even further to religious teachings within Judaism,
Islam and other religions.8
SRI gained prominence in the U.S. in the 1960s, during the Vietnam War. Anti-war protests andgrowing civil rights movements contributed to increased scrutiny of business practices that
contributed to war efforts, as well as those that negatively affected marginalized groups in the U.S.
The 1970s were marked by continued pushes for progress in sustainable investing, notably related toenvironmental issues. Prominent U.S. legislation passed during these two decades included the Clean
Air Act, the Clean Water Act and the Endangered Species Act, as well as the Occupational Safety and
Health Act, aimed at protecting the health and safety of workers.
The 1980s saw continued interest in sustainable business practices, fueled in part by prominentenvironmental disasters and social events. The Exxon Valdez oil spill of 1989 sparked the creation of
the Coalition of Environmentally Responsible Companies (Ceres), a nonprofit organization that aims to“encourage individual and collective actions that help stabilize the climate, protect water and natural
resources, build a just and inclusive economy, and accelerate sustainable capital markets.”9
In 1990, the Domini 400 Social Index, today known as the MSCI KLD 400 Social Index, was created.10
This was one of the first SRI indexes, and the objective was to provide a benchmark for investing incompanies with strong sustainability profiles, while avoiding companies incompatible with certain
values.11
In 1997, Ceres, in collaboration with the Tellus Institute and with involvement of the UN Environment
Programme, launched what became known as the Global Reporting Initiative (GRI). The aim was tocreate the first accountability mechanism to ensure companies adhere to responsible environmental
conduct principles. This was later broadened to provide guidelines for participating companies andorganizations when reporting their social, economic and governance issues. These guidelines weretransitioned into voluntary sustainability reporting standards in 2016.12

8

9
10

11

12

For additional sources also used to support this section, consult the References at the end of this report. This section of ourreport is not meant to be an exhaustive discussion on the history and creation of ESG investing.
CERES. 2019. “About Us.” Ceres. 2019. https://www.ceres.org/about-us.
Investments, Domini Impact. 2021. “The Original Influencers.” Domini. September 24, 2021. Available here:
https://domini.com/insights/the-original-influencers/“MSCI KLD 400 Social Index (USD) – Index Factsheet”, May 31, 2023. Available here:
https://www.msci.com/documents/10199/904492e6-527e-4d64-9904-c710bf1533c6.
GRI (Global Reporting Initiative). 2022. “Mission & History.” www.globalreporting.org. 2022. Available here:
https://www.globalreporting.org/about-gri/mission-history/.

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ESG and Global Investor Returns Study

Also in 1997, under the auspices of the UN Framework Convention on Climate Change (UNFCCC), theKyoto Protocol was signed.13,14 This was the first international treaty to set legally binding targets for
signatory countries to reduce greenhouse gas emissions. The agreement only entered into force in2005 and is ratified by 192 parties. It was essentially superseded by the Paris Agreement in 2015.15
The key moment on the path to creating ESG was a speech at the Davos World Economic Forum in1999 in which Kofi Annan, then-Secretary General of the UN, proposed a new “Global Compact” onhuman rights, labor and environment.16 He urged business leaders to join the UN in promoting
principles that would provide a foundation for a sustainable global economy.
The Global Compact was launched in 2000, supported by various UN agencies and transnational
nongovernmental organizations.

The term ESG was borne out of a number of UN initiatives. In the 1990s,
the UN changed its stance towards the corporate sector and establishedseveral public-private partnerships to achieve its economic development
and social goals.

13

14

15

16

“Marking the Kyoto Protocol’s 25th Anniversary.” United Nations Climate Action. To learn more, visit:https://www.un.org/en/climatechange/marking-kyoto-protocol%E2%80%99s-25th-anniversary.
The UNFCCC secretariat (UN Climate Change) is the United Nations entity tasked with supporting the global response to thethreat of climate change. The secretariat was established in 1992 when countries adopted the UNFCCC. The UNFCCC has near
universal membership (198 parties). To learn more, visit: https://unfccc.int/about-us/about-the-secretariat.
The 192 parties include 191 states (as defined by the UN) plus the European Union (EU). For the latest status on ratification,
visit: https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-a&chapter=27&clang=_en.
“Secretary-General Proposes Global Compact on Human Rights, Labour, Environment, In Address to World Economic Forum in
Davos | UN Press.” February 1, 1999. Available here: https://press.un.org/en/1999/19990201.sgsm6881.html.

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ESG and Global Investor Returns Study

In January 2004, Kofi Annan invited several of the world’s leading financial
institutions to join a new initiative titled “Who Cares Wins.” Out of thisinitiative came a seminal report using the new term ESG.17

Additional reports have been published under this initiative, including a 2005 report issued by the UN
Environment Programme Finance Initiative (UNEP FI) Asset Management Working Group.18 This is
informally known as the Freshfields Report, as it was based on the analysis undertaken by law firm
Freshfields Bruckhaus Deringer at the request of this working group. The report outlined the legal
framework in Australia, Canada, France, Germany, Italy, Japan, Spain, the UK and the U.S. that could
be used by institutional investors to integrate ESG issues in their investment decisions.
The combination of both initiatives (“Who Cares Wins” and the Freshfields Report) is seen as thefoundation of the UN-backed Principles of Responsible Investment (PRI) in 2006.19 The PRI is anindependent group that encourages investors to use responsible investment to enhance returns andbetter manage risks, garnering over 5,300 signatories in mid-2023.20 At the end of 2021, the 3,800+
PRI signatories of record represented USD 121 trillion of assets under management.21
The 2000s and 2010s saw further development of corporate sustainability frameworks across theglobe. In 2011, the Sustainability Accounting Standards Board (SASB) was founded. It guides
disclosures of financially material information related to sustainability.22 The SASB has now been
integrated into the International Sustainability Standards Board (ISSB), as discussed in “Overview of
ESG Investing and Future Trends.”
In 2015, countries signed the Paris Agreement, another legally binding climate treaty sponsored by
the UNFCCC, effectively replacing the Kyoto Protocol.23 The Paris Agreement was reached at the UN
Climate Change Conference (COP21) in Paris and entered into force in November 2016. Its
predecessor, the Kyoto Protocol, required that only developed countries reduce emissions, while theParis Agreement called on all countries to set emissions targets. The Paris Agreement was ratified by
194 parties. A key objective is to substantially reduce global greenhouse gas emissions, such that the

17

18

19
20

21

22
23

“Who Cares Wins – Connecting Financial Markets to a Changing World.” The UN Global Compact, June 2004.
Available here:
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-atifc/publications/publications_report_whocareswins__wci__1319579355342
Asset Management Working Group of the UNEP Finance Initiative. October 2005. “A legal framework for the integration ofenvironmental, social and governance issues into institutional investment.” UNEP Finance Initiative. October 2005. Available
here: https://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf.
See PRI’s website section “About the PRI,” available here: https://www.unpri.org/about-us/about-the-pri.
The latest number of signatories is available here:
https://www.unpri.org/signatories/signatory-resources/signatory-directory. Accessed on June 12, 2023.
See data in graph “PRI growth 2006−2021.” in “About the PRI.” Available here: https://www.unpri.org/about-us/about-the-pri.
Accessed on June 12, 2023.
See SASB’s website section “About Us,” available here: https://sasb.org/about/.
“The Paris Agreement.” United Nations Climate Action. To learn more, visit:https://www.un.org/en/climatechange/paris-agreement.

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ESG and Global Investor Returns Study

global temperature increase in the 21st century is limited to 2 degrees Celsius (2.0 C).24 At the sametime, the agreement calls for efforts to limit the temperature increase even further to 1.5 C. The UN
argues that to keep global warming to no more than 1.5 C, global emissions need to be reduced by
45% by 2030 and reach net zero by 2050.25 This has led to the proliferation of the term net zero in the
media and by a variety of stakeholders.

Although only a few years into our current decade, the 2020s have already seen marked growth insustainable investing initiatives. Some asset managers and private equity firms have taken a prominentrole in the discussion. Notably, in his 2020 letter to CEOs, BlackRock CEO Larry Fink stressed theimportance of sustainable investment to companies’ long-term prospects. It also included a prominent
section titled “Climate Risk is Investment Risk.”.26 Fink’s 2021 letter showed continued focus onsustainable investment issues, with an emphasis on the transition to an economy with net-zero carbon
emissions, as well as increased use of data and disclosure related to sustainable investing activities.27 His
2022 letter continued to address the theme of sustainable investing, arguing that global energy transition
will be one of the most important factors affecting capital allocation decisions in the years ahead. However,he acknowledged the politically charged nature surrounding ESG investing.28 At a recent conference, hestated that he will no longer be using the term ESG, because it has been politically weaponized, eventhough he will continue to pursue related sustainability principles.29
Indeed, the topic of ESG has recently become the focus of political wrangling, particularly in the U.S. This
polarization has led to legislative proposals both for and against including ESG in investment mandates.
While political uncertainty may shift investment decisions in the short-term, the broader shift towards agreener global economy means that global investors will continue to be interested in ESG-focusedinvestment opportunities as part of their asset allocation decisions. However, the term itself may bereplaced by alternative labels.30 Time will tell which labels will ultimately prevail.

24

25

26

27

28

29

30

The 194 parties include 193 states (as defined by the UN) plus the EU. For the latest status on ratification, visit:https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-d&chapter=27&clang=_en.
“For a livable climate: Net-zero commitments must be backed by credible action.” United Nations Climate Action. To learn more,
visit: https://www.un.org/en/climatechange/net-zero-coalition. The Intergovernmental Panel on Climate Change (IPCC) is the
UN body that assesses the science related to climate change. To learn more, visit: https://www.ipcc.ch/.
“Larry Fink’s 2020 Letter To CEOs: A Fundamental Reshaping of Finance,”, available here:
https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter.
“Larry Fink’s 2021 Letter To CEOs,” available here: https://www.blackrock.com/corporate/investor-relations/2021-larry-finkceo-letter.
“Larry Fink’s 2022 Letter To CEOs: The Power of Capitalism,” available here: https://www.blackrock.com/corporate/investorrelations/larry-fink-ceo-letter.
Binnie, Isle, “BlackRock's Fink says he's stopped using 'weaponised' term ESG”, Reuters, June 26, 2023. Available here:
https://www.reuters.com/business/environment/blackrocks-fink-says-hes-stopped-using-weaponised-term-esg-2023-0626/#:~:text=%22I%20don't%20use%20the,far%20right%2C%22%20Fink%20said.
For example, see Forte, Peyton and Isabelle Lee, “To Sidestep ‘Weaponized’ ESG, Do-Good Funds Embrace a New Label.”Bloomberg. June 28, 2023. Available here: https://www.bloomberg.com/news/articles/2023-06-28/to-sidestep-weaponizedesg-do-good-funds-embrace-a-new-label?sref=SfSK7hYQ.

12ESG and Global Investor Returns Study

Overview of ESG Investing andFuture Trends

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ESG and Global Investor Returns Study

Overview of ESG Investing andFuture Trends
Various studies have tried to quantify the magnitude of capital investments made in ESG andsustainability-related themes. This section outlines the trends in ESG investing and regulatory
developments that may impact the future and magnitude of such investments.31

Is Investment in Sustainability Material?
Exhibit 2 shows the proportion of sustainable investing assets relative to total assets under management(AUM) in the period of 2016−2020, according to a study from the Global Sustainable Investment Alliance32:
Exhibit 2: Global Sustainable Investments vs. Total AUM (in USD billions)Region

2016

2018

2020

Europe*12,04014,07512,017

U.S.

8,723

11,99517,081

Canada

1,086

1,699

2,423

Australasia

516

734

906

Japan

474

2,180

2,874

Total Sustainable Investments

22,83930,68335,301

Total AUM of Regions Analyzed

81,94891,82898,416

Sustainable Investments/Total AUM (%)

27.9%

33.4%

35.9%

*In 2020, Europe data includes Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Italy, Spain, Netherlands, Poland,
Portugal, Slovenia, Sweden, the UK, Norway, Switzerland and Liechtenstein.

According to this study, over a third of investment assets in developed markets were categorized assustainable, reaching a total of USD 35.3 trillion globally in 2020. In the U.S., sustainable investments stoodat USD 17.1 trillion in 2020, overtaking Europe’s share. For perspective, according to the World Bank, thetotal market capitalization of the U.S. stock market was USD 40.7 trillion in 2020.33

31

32

33

There are additional sources also used to support this section in the References listed at the end of this report. This section of
our report in not meant to be an exhaustive discussion on ESG-related regulatory and investing trends.
“Global Sustainable Investment Review 2020,” released in July 2021. Available here:
http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf.
Source: https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US. As of April 17, 2023, the Dow Jones U.S. Total
Stock Market Index, which excludes over-the-counter stocks, had a total market capitalization of USD 41.5 trillion. Source:
https://www.spglobal.com/spdji/en/indices/equity/dow-jones-us-total-stock-market-index/#overview, accessed on April 18,
2023.

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ESG and Global Investor Returns Study

The Global Sustainable Investment Alliance study is the most extensive one in capturing global private andpublic investments in sustainability, but it is only updated every two years. Since then, many questions
have arisen on what qualifies an initiative or an investment to be labeled as climate-, ESG-, orsustainability-focused. Accusations of greenwashing have risen significantly, and various reports havehighlighted the issue for several industries.34
Russia’s war on Ukraine in February 2022 exacerbated some of the concerns about what constitutes an
ESG-focused investment.
Part of the issue is the lack of consistency and standardization about what these terms mean. Also, thevoluntary nature of much of the reporting means that many companies and funds selectively disclose
information that portrays them more favorably. According to the Carrots & Sticks project, in 2020 there
were over 600 sustainability reporting provisions globally, with almost 60% being mandatory and with thebalance being voluntary.35 However, 40% of all provisions were issued in Europe.

Financial Reporting and Regulatory Trends
The recent proliferation of ESG and climate-focused investment products and rising greenwashingconcerns has led to a global regulatory shift toward requiring companies and investment funds andadvisors to report on climate and other ESG issues. This impetus also led to the creation of the ISSB in
November 2021, following a widespread support during the UN COP26 in Glasgow.36 The ISSB was
created by the International Financial Reporting Standard (IFRS) Foundation, which also oversees theInternational Accounting Standards Board (IASB)—the body responsible for developing the IFRS currently
used by 168 jurisdictions.37

34

35

35

37

For an example, see “Feeding Us Greenwash – An analysis of misleading claims in the food sector,” Changing Markets
Foundation, March 2023. Available here:
http://changingmarkets.org/wp-content/uploads/2023/03/Feeding-Us-Greenwash-web.pdf.
Analysis by Kroll of Figure 9, “Carrots & Sticks – Sustainability Reporting Policy: Global trends in disclosure as the ESG agenda
goes mainstream,” July 2020. Available here: https://www.carrotsandsticks.net/media/zirbzabv/carrots-and-sticks-2020june2020.pdf.
See “About the International Sustainability Standards Board.” Available here:
https://www.ifrs.org/groups/international-sustainability-standards-board/#about.
See “Who uses IFRS Accounting Standards?”, IFRS Foundation. Available here:
https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/.

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ESG and Global Investor Returns Study

The ISSB’s objective is to deliver a comprehensive global baseline of sustainability-related (climate andother ESG) disclosure standards. These standards provide investors and other capital market participants
with information about companies’ sustainability-related risks and opportunities, allowing them to makemore informed investment decisions. To accelerate the process of issuing global standards, the IFRSFoundation integrated other independent organizations that had previously been producing voluntary
climate or, more broadly, ESG and sustainability disclosure standards (see Exhibit 3): (1) the CDSB and (2)the VRF. The VRF itself was comprised of (1) the SASB and (2) the IIRC. The VRF’s SASB Standards
served as a key starting point for the development of the IFRS Sustainability Disclosure Standards, while
the Integrated Reporting Framework provides the connectivity between financial statements andsustainability-related financial disclosures.38
Exhibit 3: Structure of the ISSB38“IFRS Foundation completes consolidation with Value Reporting Foundation,” August 1, 2022. Available here:
https://www.ifrs.org/news-and-events/news/2022/08/ifrs-foundation-completes-consolidation-with-value-reportingfoundation/.

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ESG and Global Investor Returns Study

More recently, an agreement has been reached to transfer the monitoring of the Task Force for Climaterelated Financial Disclosures (TCFD) to the ISSB starting in 2024.39 The TCFD was created by the Financial
Stability Board (FSB) in in 2015, with the goal of identifying the information needed by investors, lenders
and insurance underwriters to appropriately assess and price climate-related risks and opportunities. In
2017, the TCFD published its final climate-related financial disclosure recommendations.40 Over time, the
TCFD improved its framework to help public companies and other organizations to disclose climate-relatedrisks and opportunities through their existing reporting processes. This framework has been used as thebasis (at least in part) for many of the voluntary and mandatory disclosures standards around climate,including in the work of the ISSB.41
Many countries have also begun the process of either proposing or adopting new rules on ESG-related
disclosures made by companies. The Carrots & Sticks database was expanded in 2023 to cover 130
countries. At the time of writing, the number of sustainability reporting provisions had increased to over
2,400, with 55% being voluntary in nature.42
Three major regulatory initiatives have the potential to significantly impact the data that corporations willsoon need to collect and disclose on ESG issues. As illustrated in Exhibit 4, proposals and final standards
by the following three bodies have a (potentially) global reach: the ISSB, the EU and the U.S. Securities andExchange Commission (SEC). The green boxes in Exhibit 4 display the relevant standards and outstanding
proposals by the three organizations. The ISSB standards were finalized in June 2023, while the EU’s
European Sustainability Reporting Standards (ESRS) were adopted by the EU Commission in July.43,44 The
SEC proposal could be published in final form in the fall of 2023.45

39

40
41
41

43

44

45

“IFRS Foundation welcomes culmination of TCFD work and transfer of TCFD monitoring responsibilities to ISSB from 2024”,
July 10, 2023. Available here:
https://www.ifrs.org/news-and-events/news/2023/07/foundation-welcomes-tcfd-responsibilities-from-2024/.
For additional details on the TCFD history, visit: https://www.fsb-tcfd.org/about/#history.
For more information on the TCFD recommendations, visit: https://www.fsb-tcfd.org/recommendations/.
“Carrots & Sticks: Sustainability reporting instruments worldwide.” Accessed by the authors of this study on May 16, 2023.
Available here: https://www.carrotsandsticks.net/reporting-instruments/?.
“ISSB issues inaugural global sustainability disclosure standards,” June 26, 2023. Available here:
https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/.
“European sustainability reporting standards – first set,” European Commission. The adopted ESRS still have to be reviewed by
the European Parliament. For the latest updates, visit:https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13765-European-sustainability-reporting-standardsfirst-set_en.
The SEC’s regulatory agenda is released semiannually. The SEC updates the list of rulemakings it plans to consider in the near
future vs. the long-term here: https://www.reginfo.gov/public/do/eAgendaMain. According to the SEC’s Spring 2023 Unified
Agenda of Regulatory and Deregulatory Actions released on June 13, 2023, the SEC expects to issue the final climate disclosurerules sometime in October 2023. For details, visit:https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=3235-AM87.

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ESG and Global Investor Returns Study

Exhibit 4: Major Corporate Sustainability Disclosure Initiatives with Potential Global Reach

These regulatory developments may have ramifications on how investors incorporate the effects of ESG in
the valuation of various businesses. Companies with operations across multiple countries may be subject
to multiple disclosure requirements. The concept of materiality differs between standards and proposals,
resulting in the need for a complex data-gathering process that will require technology solutions and aclose attention to internal controls. Regarding climate (part of the “E” pillar of ESG), these standards andproposals rely on some elements of the recommendations developed by the TCFD. Companies required tocomply with either the ISSB’s standards or the EU’s CSRD requirements may need to start collecting andreporting data for annual reporting periods starting in 2024, with the first sustainability reports filed in
2025 (various phase-ins are available and applicability will vary by company size, among other factors).
Investors will update their valuation models, as more standardized information becomes available,
including new assessments on how material risks and opportunities are to the financial performance of abusiness.
A recent analysis by Bloomberg Law documented the most common ESG frameworks used by U.S. publicly
traded companies. Based on data from early 2023, it identified the following reporting frameworks as themost often cited (in decreasing order of usage):46
•
•
•

•
•
•

46

SASB, which is now part of the ISSBTCFD, which will become part of the ISSB in 2024
Science Based Targets Initiative (SBTi), which is a partnership between the Carbon Disclosure
Project (CDP), the UN Global Compact (UNGC), the World Resources Institute and the World Wide
Fund for Nature (WWF, formerly World Wildlife Fund)GRI
UN SDG, which are supported by the UNGC
CDP

Gampher, Abigail, “ANALYSIS: Companies Rely on ESG Frameworks Amid Uncertainty,” Bloomberg Law, April 21,
2023. Available here:
https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-companies-rely-on-esg-frameworks-amid-uncertainty.

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ESG and Global Investor Returns Study

Some of these frameworks are solely focused on climate-related issues (e.g., TCFD, SBTi, CDP), whileothers have a broader application.
New regulations in the fund space against misleading marketing of investments as sustainable or ESGfocused have been recently proposed or enacted. The most notable of these are those issued by the EU
and the SEC (see Exhibit 5).
Exhibit 5: Major Investment Fund Sustainability Disclosure Proposals and Regulations with Potential
Global ReachIn 2019, the EU adopted new sustainability disclosure regulations that applied to providers of financial
products and financial advisors in the EU. The main (or core) provisions under the SFDR became effectivein March 2021 (Level 1 disclosures). Additional enhanced disclosures at both the entity and at the
product/fund level became effective in January 2023 (Level 2 disclosures).47

47“Sustainability-related disclosure in the financial services sector,” European Commission. For the latest developments, visit:https://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_en.

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ESG and Global Investor Returns Study

The purpose of the SFDR was to improve transparency in the market for sustainable investment products,
in an effort to prevent greenwashing. To improve the quality and comparability among financial products,
the SFDR introduced a distinction between types of sustainable investments. Asset managers are required
to classify their funds depending on their level of sustainability, which are now known based on therespective articles in the legislation:48•

Article 6: These funds must either disclose how they integrate financially material ESG risk
considerations into the investment decision-making process, or explain why sustainability risks
are not relevant. However, these funds do not meet the additional criteria of Article 8 or Article 9
products (i.e., non-sustainable funds).

•

Article 8: Funds that promote environmental or social characteristics and the underlying
investments follow good governance practices (aka light green).

•

Article 9: Funds that have sustainable investment as their objective and the underlying
investments follow good governance practices (aka dark green). These funds should make apositive impact on society or the environment.

In the U.S., the disclosure requirements for investment funds are at a less advanced stage. On May 25,
2022, the SEC proposed changes to its Investment Company Act “Names Rule,” which would expand
requirements for funds labeled as ESG.49 Currently, registered investment companies whose names
suggest a focus in a particular type of investment are required to adopt a policy to invest at least 80% of
the value of their assets in those investments. The objective of the proposed rule is to address fund namesthat are likely to mislead investors about a fund’s investments and risks. Under the new proposal, additional
investor protection would be added by extending the 80% investment requirement to more funds. For
instance, fund names with terms suggesting that investment decisions incorporate ESG factors would be
required to invest at least 80% in assets with characteristics suggested by the fund name.
On that same day, the SEC proposed amendments to existing disclosure rules, with the aim of promoting
consistent and comparable ESG disclosures by certain funds and advisors.50 The proposed amendments
seek to categorize certain types of ESG strategies broadly and require funds and advisors to provide more
specific disclosures in fund prospectuses, annual reports and advisor brochures based on the ESG
strategies they pursue. Final rules under both proposals are expected in late 2023.51

48

49

50

50

Many articles have been writen that analyze the SFDR fund classification. The following is an example: DLA PIPER, “Comparing
ESG disclosure rules for funds in the EU, UK and the US – SFDR, SDR and SEC proposals,” October 4, 2022. Available here:
https://www.dlapiper.com/en-us/insights/publications/2022/10/comparing-esg-disclosure-rules-for-funds.
SEC Press Release 2022-91, “SEC Proposes Rule Changes to Prevent Misleading of Deceptive Fund Names,” May 25, 2022.
Available here: https://www.sec.gov/news/press-release/2022-91.
SEC Press Release 2022-92, “SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies
About ESG Investment Practices,” May 25, 2022. Available here: https://www.sec.gov/news/press-release/2022-92. The
proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registeredinvestment companies, and business development companies.
For the latest updates, visit (1) Investment company names:
https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=3235-AM72; and (2) Enhanced ESG disclosures:https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=3235-AM96.

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ESG and Global Investor Returns Study

Rise in Regulatory Enforcement and Litigation
Regulators around the world have begun enforcement actions in this area. For example, in 2021 the SEC's
Division of Enforcement created a task force focused on climate and ESG Issues.52 The objective of thistask force is to identify potential violations, including material gaps or misstatements in the disclosure ofclimate risks (under existing rules) by issuers, as well as disclosure and compliance issues relating toinvestment advisers’ and funds’ ESG strategies.53 While prior to the creation of this taskforce the SEC had
already undertaken enforcement actions related to ESG, its very creation foreshadows more enforcement
activity in the future. In fact, there are recent reports that the SEC’s enforcement division has sent
document requests, including subpoenas, to several asset managers relating to their ESG marketing
practices.54
Litigation initiated by investors and consumers about false ESG claims has also increased.55
The combination of new or proposed disclosure rules, more regulatory oversight, enforcement actions andlitigation trends has led many funds to remove or change their sustainability or ESG labeling in 2022.56
These trends have also led ESG ratings providers to change or remove some of their ratings. For example,in March 2023, MSCI changed its methodology of fund ratings (not to be confused with the company-level
ESG ratings used in the Kroll study), which resulted in one-time downgrades for approximately 31,000
funds. According to MSCI estimates, the changes mean that only 0.2% of funds are expected to have arating of AAA in the future, compared to 19.9% at end of March 2023.57

Need for Attestation Will Increase
The future of ESG and sustainability investing will be predicated on investors’ confidence in such labels,
which will increase the demand for attestation and assurance services dramatically. A recent study
prepared by the International Federation of Accountants (IFAC), the Association of International Certified
Professional Accountants and the Chartered Institute of Management Accountants (AICPA & CIMA) foundthat while 95% of large global companies reported ESG information, only 64% obtained
assurance/verification over some of the information they disclosed in 2021.58 Moreover, this is a small

52

53

54

55

56

57

58

“SEC Press Release 2021-42, “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues,” March 4, 2021.
Available here: https://www.sec.gov/news/press-release/2021-42.
More details on the Enforcement Task Force Focused on Climate and ESG Issues and examples of recent SEC actions can befound here: https://www.sec.gov/securities-topics/enforcement-task-force-focused-climate-esg-issues.
Temple-West, Patrick and Madison Darbyshire, “SEC lawyers subpoena fund managers over ESG disclosures”, August 15,
2023. Available here: https://www.ft.com/content/518387b0-5c4c-4ff7-8221-27be0bb0b8ac.
For example, see Gampher, Abigail, “Analysis: New Year, New ESG-Related Litigation?”, Bloomberg Law, February 15, 2023.
Available here: https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-new-year-new-esg-related-litigation.
Fore example, see Morningstar, Inc., “SFDR Article 8 and Article 9 Funds: Q4 2022 in Review – Article 9 fund assets shrink by
EUR 175 billion, or 40%, following a wave of downgrades,” January 26, 2023.
MSCI, “Enhancements to MSCI’s Fund ESG Ratings,” March 2023. Available here:
https://www.msci.com/documents/10199/e147bb2f-3b5b-8314-cdaf-9277b9586d59.
This study reviews market practice for the reporting and assurance of ESG or sustainability information of 1,350 companies
across 21 jurisdictions for 2021. Source: “The State of Play: Sustainability Disclosure & Assurance 2019–2021 Trends &Analysis,” IFAC and AICPA-CIMA, February 2023. Available here: https://www.ifac.org/knowledge-gateway/contributingglobal-economy/publications/state-play-sustainability-disclosure-assurance-2019-2021-trends-analysis.

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ESG and Global Investor Returns Study

subset of the universe of companies and funds that will see an increased need for such attestation services,which will be required in some degree by the new ESG-related standards and proposals outlined earlier.
In March 2023, the International Foundation of Ethics and Audit (IFEA) was created to support a growing
need for assurance services.59 This new oversight board supports high-quality, international standardsetting in ethics, audit and assurance in the public interest. The IFEA fulfills its mission through its twostandard-setting boards, the International Ethics Standards Board for Accountants (IESBA) and theInternational Auditing and Assurance Standards Board (IAASB), which were both previously part of IFAC.
Both the IESBA and IAASB announced plans to issue public consultations in 2023 on standards related tosustainability ethics and sustainability assurance, respectively, with the intent to finalize these standards
in 2024.60 In early August, the IAASB issued a proposed international standard on sustainability assurancewith a comment deadline of December 1, 2023.61 The IAASB indicated that, if adopted as proposed, thiswould become the most comprehensive sustainability assurance standard available to all assurance
practitioners across the globe. The new standard would apply to information reported about any
appropriate sustainability matter and prepared under any suitable framework. It would also apply to both
limited and reasonable assurance engagements.62

What does this mean for Investors and Other
Stakeholders?
The U.S. Sustainable Investment Forum (U.S. SIF) produces a biennial report on U.S. sustainable investing
trends. In 2022, the U.S. SIF decided to change its methodology in response to the rapid growth of the
field (including regulatory initiatives and accusations of greenwashing), coupled with the lack of
information on how institutions are integrating ESG in their investment decisions.63 The new methodology
required more granular information by fund managers, which resulted in a significant decline in AUM
considered as being sustainability focused.

59

60

61

62

63

“New International Foundation For Ethics And Audit Strengthens Independence of The Standard-Setting System,” March 27,2023. Available here: https://www.ethicsandaudit.org/news-events/2023-03/new-international-foundation-ethics-and-auditstrengthens-independence-standard-setting-system.
“IESBA and IAASB Highlight Commitment to Deliver on Recommendations in New IOSCO Report on a Global Assurance
Framework for Sustainability-Related Corporate Reporting,” March 28, 2023. Available here: https://www.iaasb.org/newsevents/2023-03/iesba-and-iaasb-highlight-commitment-deliver-recommendations-new-iosco-report-global-assurance-0. For
an updated timeline on the sustainbility assurance project, visit:https://www.iaasb.org/consultations-projects/sustainability-assurance.
“Proposed International Standard on Sustainability Assurance 5000, General Requirements For Sustainability Assurance
Engagements”, August 2, 2023. Available here: https://www.iaasb.org/publications/proposed-international-standardsustainability-assurance-5000-general-requirements-sustainability.
“What You Need to Know About International Standard on Sustainability Assurance 5000”, August 14, 2023. Available here:
https://www.iaasb.org/news-events/2023-08/what-you-need-know-about-international-standard-sustainability-assurance5000.
U.S. SIF, “2022 Report on US Sustainable Investing Trends – Executive Summary.” Available here:
https://www.ussif.org//Files/Trends/2022/Trends%202022%20Executive%20Summary.pdf.

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ESG and Global Investor Returns Study

Exhibit 6 shows the evolution of U.S. investments in sustainable funds from 2016 to 2022. As a result of
the methodology change, U.S. SIF cut the size of sustainability-related AUM by more than half from 2020
to 2022. Note that the U.S. data in this exhibit overlaps with some of the data in Exhibit 2.
Exhibit 6: U.S. Sustainable AUM vs. Total AUM (in USD trillions) 64

Total U.S. Sustainable Investments

2016
8.7

2018
12.0

2020
17.1

2022
8.4

Total U.S. AUM

40.3

46.6

51.4

66.6

21.6%

25.7%

33.2%

12.6%

Sustainable Investments/Total AUM (%)*

*Differences due to rounding. Source: U.S. SIF Foundation. Analysis by Kroll.

It could be argued that the new U.S. SIF methodology is too stringent and, as fund managers provide moredetailed information, the proportion of sustainable fund investments will rise again, although perhaps not
the levels reported in 2020.
Regardless, as standard-setting efforts, regulatory and enforcement actions, and litigation trends evolve,
we will see major changes in the quantum of ESG investing. While this has become a prominent topic ofdiscussion among corporations, investors and other stakeholders, many questions remain.
How does investing in companies with a greater focus on ESG affect investment returns,
which has implications on capital allocation decisions and ramifications to asset managers’
fiduciary duty?

What is the role of ESG in investment valuation, business decisions and corporate financetheory and practice?

Our study aims to start answering the first question and understanding the second. ESG investing haschanged a lot since its start. Even so, a thorough understanding of the impact of using an ESG frameworkon stock returns is a logical starting point for investors, regulators, and other stakeholders to begin
evaluating the role that ESG plays in investment decisions. In addition, in a world where the topic of ESG
has become politicized, corporate decision-makers will have to show a linkage between economic returns
and ESG initiatives. Our study may help in that conversation.

64

Refer to the individual trend reports from 2016 through 2020, available here: https://www.ussif.org/currentandpast.

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ESG and Global Investor Returns Study

Academic Research andSustainability

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ESG and Global Investor Returns Study

Academic Research andSustainability
The impact of ESG investing on both cost of capital and portfolio returns is ambiguous, and the debate
in academia is still ongoing.65 Academic research on ESG can be categorized into two types of studies:
corporate and investor. Corporate studies analyze how adopting ESG investing principles impacts thefirm’s financial performance. From a corporate manager’s perspective, this can be summarized by the
impact of ESG policies on the firm’s cash flows and cost of capital. Investor studies refer to the market
performance of ESG funds, portfolios, or indexes versus traditional ones, from the perspective of anasset manager.66
Differentiating between governance and other areas of ESG (i.e., environmental and social) is important inacademic literature. Governance has been a significant topic as far back as the 1970s, when researchers
identified the agency problem and how it affects financial decision-making.67 Many theories in corporate
finance and portfolio management are based on corporate governance. Until very recently less interest had
been shown in the other two components of ESG.
In a study published in 2017, the authors analyzed the content of 20,725 articles in 21 finance journals
and found that only 12 articles related to climate change were published during the 1998–2015 period. In
addition, none of these papers were published in the three leading journals of finance.68 However, more
recently there has been an uptick in academic research and financial journals publishing special issues
highlighting research on sustainability.69
Confusion does exist even when reviewing research conducted by different academics. Generally,
researchers have started to designate green firms (and assets) as those with good ESG credentials, whilebrown firms (and assets) are those with poor ESG credentials. Unfortunately, sometimes that designation
is viewed through a lens of overall ESG ratings, while others are based on a firm’s (or asset’s) specificenvironmental rating. A company that scores well on the environmental front can have a poor score insocial or governance factors, making it more difficult to compare and understand the results of researchstudies.

65

66

67

68

69

Larcker, David F., Brian Tayan, and Edward M. Watts. 2022. “Seven myths of ESG.” European Financial Management 28 (4):869–882.
This section is not meant to provide an exhaustive academic literature review of reseearch on the topics of ESG and sustainable
investing.
Jenson, Michael C., and William H. Meckling. 1976. “Theory of the firm: Managerial behavior, agency costs and ownership
structure.” Journal of Financial Economic 3 (4): 305–360.
Diaz-Rainey, Ivan, Becky Robertson, and Charlie Wilson. 2017. “Stranded research? Leading finance journals are silent on
climate change.” Climatic Change 143: 243–260. The leading three journals of finance are: Journal of Finance, Journal of Financial
Economics, and Review of Financial Studies.
The first paper on climate finance and how to mitigate the risk of climate change on economies appeared in the early 1970s. For
more details, please refer to: Giglio, Stefano, Bryan Kelly, and Johannes Stroebel. 2021. “Climate finance.” Annual Review of
Financial Economics 13: 15–36.

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ESG and Global Investor Returns Study

Corporate Manager View
In Theory
In theory, investors are only concerned with the risk-reward trade-off when allocating their resources;
hence, all investors hold the market portfolio: the best diversified portfolio in the market. This assumption
ignores an investor’s preference for certain types of stocks, or exclusion of other stocks, based on theperceived ethical standards of the firm.70
Diversity of investors’ tastes is not a new topic in financial academic literature.71 Academic research has
been pushing against some of the potential flaws of these assumptions since the early development ofmodern finance theory. However, these studies were not necessarily specific to sustainability. As the topic
of sustainable investment developed and more investors started to express interest, research followed. In
2001, a published study developed an equilibrium model specific to green investments that implied thatwhen fewer investors hold the stock of a firm, the opportunities for risk diversification are reduced; hence,
the firm’s cost of capital will be higher.72 This marked the beginning of the development of theory regarding
sustainability and ethical investment.
Can We Talk About an ESG Risk Premium?
To include corporate sustainability within asset pricing models, researchers proposed alternatives to the
traditional asset pricing models (i.e., the Capital Asset Pricing Model (CAPM)). The question that academic
studies are trying to answer is: how do ESG scores affect asset pricing? First, do ESG scores provide
information about the short- or long-term risks facing the firm? Second, does firm exclusion affect asset
pricing? We will discuss herein some of the models that are trying to incorporate these concepts into asset
pricing; however, this discussion is not extensive nor comprehensive. The academic literature is still
expanding and exploring new ways to understand and incorporate sustainability into asset pricing.

70

71

72

Milton Friedman outlined the view of traditional finance theory in his famous article on corporate social responsibility. Friedman,
Milton. 1970. “The Social Responsibility Of Business Is to Increase Its Profits.” The New York Times, September 13, 1970,
https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html.
Professor Robert Merton has one of the most cited papers from this period. Merton, Robert C. 1987. “A Simple Model of CapitalMarket Equilibrium with Incomplete Information.” Journal of Finance 42 ( 3: 483–510.
Heinkel, Robert, Alan Kraus, and Josef Zechner. 2001. “The effect of green investment on corporate behavior.” Journal of financial
and quantitative analysis 36 (4): 431–449. The authors did not differentiate between SRI and green investment whendeveloping their model.

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ESG and Global Investor Returns Study

The first model we will discuss is the ESG-adjusted CAPM.73 In this model, the authors assume that ESG
scores influence the cost of equity in two ways: first, by providing information about a company’s
fundamentals, and second, by influencing investors’ preferences and asset allocation choices. The findings
suggest that higher governance scores predict strong company fundamentals and lower preference frominvestors, leading to relatively cheap valuations and positive returns. On the contrary, higher environmental
and social scores are weak predictors of future company performance but generate higher demand frominvestors, which could help explain higher valuations of stocks that score well on these metrics.
The second model is a two-factor model including the market and a “green factor.”74,75 These researchers
call green assets those that are focused on ESG issues and brown assets those that do not have an ESG
focus. They found that in equilibrium, green assets have a lower expected return associated with a negativealpha, while brown assets have a higher expected return associated with a positive alpha. However,changing expectations from customers and investors in favor of ESG can lead to outperformance of green
stocks. This study provides a tangible way to measure the exposure of different stocks to an ESG factor
and shows that green and brown stocks have opposite exposure to a green factor.
The third model is labeled Sustainable CAPM (S-CAPM). This model separates the effects of sustainability
into two components: neglected stock and taste premia.76 The author thinks of the taste premium as afunction of sustainable investors’ desire to hold green assets (i.e., those that integrate environmental
issues). He found that whether stocks are excluded or integrated through certain measures of ESG,
sustainable investing can contribute to an increase in the cost of capital for the least ethical or theenvironmentally riskiest companies. Focusing on U.S. stocks, he also found that the integration ofenvironmental criteria by green investors impacts industries differently, with an annual taste premium
ranging from -1.12% for the most ESG-overweighted industries to +0.14% for the most ESGunderweighted industries, while the average annual exclusion effect of sin stocks was 2.79%.77

73

74

75

76

77

Pedersen, Lasse Heje, Shaun Fitzgibbons, and Lukasz Pomorski. 2021. “Responsible investing: The ESG-efficient frontier.”
Journal of Financial Economics 142 (2): 572–597.
Pástor, Ľuboš, Robert F. Stambaugh, and Lucian A. Taylor. 2021. “Sustainable investing in equilibrium.” Journal of Financial
Economics 142 (2): 550–571.
A simple version of the ESG factor is a green-minus-brown portfolio return, where both green and brown portfolios are weighted
by ESG characteristics.
Zerbib, Olivier David. 2022. “A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Environmental Integrationand Sin Stock Exclusion.” Review of Finance 26 (6): 1345–1388.
Sin stocks are shares of companies that operate in industries considered unethical. For example: gambling, alcohol, tobacco,sex-related industries, and weapons manufacturers.

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ESG and Global Investor Returns Study

Empirical Findings
Empirical findings show mixed results on the relationship between sustainability and cost of capital. Somestudies that show a positive relationship between sustainability and cost of capital. Others support thetheory of a negative to nonexistent relationship.
The first studies in this area were focused on corporate social responsibility (CSR), a precursor to ESG. Oneof the first studies on cost of capital and CSR suggests that company investment in improving responsible
employee relations, environmental policies and product strategies contributes substantially to reducing thecompany’s cost of equity.78 The authors expanded their work to an international setting but narrowed theirfocus to corporate environmental responsibility (CER) measures. In a sample of 2,107 firms from 30
countries, they reached a similar conclusion in that companies with higher CER exhibited a lower cost ofequity.79
These results are not consistent throughout all studies. In a study by different authors that covered 39
countries, the authors found that the strength of the relationship between cost of capital and CSR depends
on the level of investor protection in that country.80 Specifically, countries where investor protection isstrong, the results suggested that the cost of equity fell when a company invested in CSR. Conversely, incountries where investor protection is poor, investing in CSR led to a rise in the cost of equity.
Other studies look at the perception of societal harm from companies as it relates to the cost of capital.
There has been an increase in societal norms against funding operations that promote vices, and someinstitutional investors are willing to pay a financial cost for abstaining from investing in these vices.81 A
well-cited study finds that sin stocks have higher expected returns than otherwise comparable stocks,
consistent with these stocks being neglected by norm-constrained investors and companies facing greater
litigation risk due to changing social norms.82 They refer to this as the “sin premium.”83

78

79

80

81
82

83

El Ghoul, Sadok, Omrane Guedhami, Chuck CY Kwok, and Dev R. Mishra. 2011. “Does corporate social responsibility affect thecost of capital?” Journal of banking & finance 35 (9): 2388–2406.
El Ghoul, Sadok, Omrane Guedhami, Hakkon Kim, and Kwangwoo Park. 2018. “Corporate environmental responsibility and thecost of capital: International evidence.” Journal of Business Ethics 149: 335–361.
Breuer, Wolfgang, Torbjörn Müller, David Rosenbach, and Astrid Salzmann. 2018. “Corporate social responsibility, investor
protection, and cost of equity: A cross-country comparison.” Journal of Banking & Finance 96: 34–55.
The same argument can be applied to companies operating in industries that are perceived as harmful to the environment.
Hong, Harrison, and Marcin Kacperczyk. 2009. “The price of sin: The effects of social norms on markets.” Journal of Financial
Economics 93 (1): 15–36.
In the same vein, the argument can also apply to polluting firms. In the U.S. market, companies with higher carbon dioxide
emission (CO2) earn higher returns, controlling for size, book-to-market, and other return predictors; Bolton, Patrick, and Marcin
Kacperczyk. 2021. “Do investors care about carbon risk?” Journal of Financial Economics 142 (2): 517–549.

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ESG and Global Investor Returns Study

However, others show that the sin premium disappears when controlling for additional risk factors of thesecompanies (i.e., profitability and investment risk factors).84 Other studies conclude that at the current levelof socially conscious capital, there is no impact on the cost of capital. The authors conclude that exclusionof stocks (through divesting bad ESG stocks) does not drive investor flows enough to make a difference.
Instead, they recommend more involvement in management decision-making for a larger impact on longterm cost of capital.85
In a sample of European firms in 17 countries that are members of the STOXX® Europe 600 index, otherauthors explore the relationship between ESG scores and cost of capital. They found that ESG scores do
not have a significant impact on the cost of equity and betas unless the company is domiciled in a country
with a weaker legal environment; in which case, a higher ESG score is associated with a lower cost ofcapital. The ESG score does have a significant positive impact on the cost of debt according to the authors.
This can be explained by the fact that firms that have a high ESG score can obtain significantly moreleverage. The “G” component is more important in this case, where firms with higher governance scores
can improve their cost of capital, especially in countries with weaker legal systems. For context, theseauthors scored Finland the best in terms of legal environment, followed by Norway, Switzerland, andDenmark. The countries having the weakest legal environment scores were Italy, Poland, andLuxembourg.86

84

85

86

Blitz, David, and Frank J. Fabozzi. 2017. “Sin stocks revisited: Resolving the sin stock anomaly.” The Journal of Portfolio
Management 44 (1): 105–111.
Berk, Jonathan, and Jules H. van Binsbergen. “The impact of impact investing.” August 2021. Stanford Graduate School ofBusiness Research Paper, Law & Economics Center at George Mason University Antonin Scalia Law School Research Paper
Series No. 22-008. Available at SSRN: https://ssrn.com/abstract=3909166.
Priem, Randy, and Andrea Gabellone. November 2022. “The Impact of a Firm’s ESG Score on Its Cost of Capital: Can a HighESG Score Serve as a Substitute for a Weaker Legal Environment?” Available at SSRN:
https://ssrn.com/abstract=4286057.

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ESG and Global Investor Returns Study

For the Asset Manager
In Theory
We have seen more interest in portfolio performance measurement of ESG investing after the exceptional
performance of ESG-related assets over the last few years. As outlined in prior sections, SRI was the firstform in the evolution towards ESG investing and integration. In its original form, SRI entailed excluding
certain types of investments considered sin stocks from portfolio allocation decisions (i.e., negative
screening). Nowadays, SRI can also take the form of positive screening (e.g., investing in environmentallyfriendly stocks).
In theory, limiting investments to sustainable assets versus all available assets lowers performance. Assetexclusion lowers the benefits of diversification and leads to a constrained efficient frontier. In addition, theefficient market hypothesis predicts that SRI portfolios (and sustainable funds, by extension) cannot
produce abnormal returns, since investors can always replicate these screening strategies based on public
information.87
Some research papers found that underperformance by ESG funds is due to higher costs of holding suchfunds. The authors show that ESG funds appear to underperform financially, relative to other funds within
the same asset manager and investment year, and charge higher fees. They also find that the underlying
investments in these ESG funds perform worse when it comes to their E and “S” credentials relative to
non-ESG funds by the same issuers. According to these authors, on average, ESG funds pick companies
with worse employee treatment and environmental practices than non-ESG funds, precisely the oppositeof the stated objective.88

87

88

Kim, Chang‐Soo. 2019. “Can socially responsible investments be compatible with financial performance? A meta‐analysis.”
Asia‐Pacific Journal of Financial Studies 48 (1): 30–64.
Raghunandan, Aneesh, and Shiva Rajgopal. 2022. “Do ESG funds make stakeholder-friendly investments?” Review of
Accounting Studies 27 (3): 822–863.

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ESG and Global Investor Returns Study

A recent research paper tries to solve the disparate results between studies, some finding a “carbon
premium” (i.e., higher performance by green stocks (in this case, green stocks are defined as being moreclimate-friendly) relative to brown stocks, while others find the exact opposite). Using carbon dioxide (CO2)emissions reported by companies to measure their level of “greenness,” the authors found that green
stocks across G-7 countries have generally provided higher returns than brown stocks for much of the past
decade. However, they found that brown stocks outperformed green ones during the energy crisis of2022.89
Transition Period
The last few years marked a period of transition where investors moved to more sustainable portfolios,
either to reduce ESG-related risks or to gain nonfinancial utility from holding green assets (either ESGfocused or environmentally friendly investments). Because of this change in allocation towards green
assets, these assets might earn excess returns. So, the results of the empirical studies may be dependenton what period is studied.90 Hence, we observe contrasting evidence for the relationship between ESG
ratings and returns during this transition period to a new equilibrium.
Some research has found that over the 2016–2021 period, the performance of sustainability-focusedmutual funds was mainly due to the flow of funds into these assets leading to upward price pressures andcausing high realized returns, which did not reflect expected returns.91 The study argued that for every
dollar flowing from the market portfolio into sustainability-focused mutual funds, the aggregate value ofgreen stocks increased by USD 0.40. In the absence of flow-driven price pressure, sustainable funds would
have underperformed the market from 2016 to 2021, according to this author.
In another study, the authors found that investors value sustainability itself positively (i.e., for nonfinancial
utility). Morningstar, Inc. first published mutual fund sustainability ratings back in March 2016 for 20,000+
U.S. funds. Mutual funds categorized as low-sustainability saw an outflow of USD 12 billion, while funds
holding assets categorized as high-sustainability saw net inflows of more than USD 24 billion over an 11month period after the ratings were originally issued. Experimental evidence suggests that sustainability
is viewed as positively predicting future performance; however, the authors found no evidence that highsustainability funds outperformed low-sustainability funds.92

89

90
91

92

Bauer, Michael, Daniel Huber, Glenn D. Rudebusch, and Ole Wilms. 2022. “Where is the Carbon Premium? Global Performanceof Green and Brown Stocks.” Journal of Climate Finance 1, 100006. The Group of Seven (G-7) is an intergovernmental politicalforum consisting of Canada, France, Germany, Italy, Japan, the UK, and the U.S.; additionally, the EU is a “non-enumerated
member.”Cornell, Bradford. 2021. “ESG preferences, risk and return.” European Financial Management 27 (1): 12–19.
van der Beck, Philippe. 2021. “Flow-driven ESG returns.” Swiss Finance Institute Research Paper No. 21-71.
Available here: https://ssrn.com/abstract=3929359.
Hartzmark, Samuel M., and Abigail B. Sussman. 2019. “Do investors value sustainability? A natural experiment examining
ranking and fund flows.” The Journal of Finance 74 (6): 2789–2837.

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ESG and Global Investor Returns Study

Divergence Between Ratings
Transitioning from a traditional investment profile into a more sustainable investment profile is complicatedby the significant divergence in the ratings assigned by different ESG ratings agencies. Numerous ESG
ratings providers use varying different methodologies, as discussed earlier.93 The sheer number of rating
agencies is not an issue, but their divergence in rating the same companies is problematic.94 This level ofdivergence is not observed when credit rating agencies issue a debt rating for the same company, and,unlike ESG ratings, the correlation between interagency debt ratings is quite high.
This diversion not only confuses investors, but it also makes it difficult to correctly identify green versus
brown firms, according to another study. First, ESG rating uncertainty reduces investor demand for stocks,
especially for ESG-sensitive investors (i.e., norm-constrained institutions) in their ESG investments (e.g.,green stocks). Second, brown stocks outperform green stocks only when rating uncertainty is low, and thenegative return predictability of ESG ratings does not hold for the remaining firms. Third, ESG rating
uncertainty could increase the cost of capital for green companies.95 ESG uncertainty affects the risk-return
trade-off. ESG disagreement is associated with higher return volatility, larger absolute price movements
and a lower likelihood of issuing external financing.96
Looking at individual ESG ratings for companies in the S&P 500 index, other authors find that stock returns
are positively related to ESG rating disagreement. They argue that this suggests there is a risk premium
for firms with higher ESG rating disagreement, especially in the environmental dimension.97 Studies
focusing on the source of disagreement find that there is a rater effect, where more than half of the ESG
rating divergence can be attributed to ESG ratings agencies measuring different values for the same
category.98

93

94

95

96

97

98

Also, see Li, Feifei, and Ari Polychronopoulos. January 2020. “What a difference an ESG ratings provider makes.” Research
Affiliates. Available here: https://www.researchaffiliates.com/publications/articles/what-a-difference-an-esg-ratings-providermakes. The authors identified 70 different providers of ESG ratings as of the end of 2019, excluding the multitude of investmentbanks, government organizations, and research institutions that conduct ESG-related research which can be used to createcustomized ratings.
Dimson, Elroy, Paul Marsh, and Mike Staunton. 2020. “Divergent ESG ratings.” The Journal of Portfolio Management 47 (1):75–87.
Avramov, Doron, Si Cheng, Abraham Lioui, and Andrea Tarelli. 2022. “Sustainable investing with ESG rating uncertainty.”
Journal of Financial Economics 145 (2): 642–664.
Christensen, Dane M., George Serafeim, and Anywhere Sikochi. 2022. “Why is corporate virtue in the eye of the beholder? Thecase of ESG ratings.” The Accounting Review 97 (1): 147–175.
Gibson Brandon, Rajna, Philipp Krueger, and Peter Steffen Schmidt. 2021. “ESG rating disagreement and stock returns.”
Financial Analysts Journal 77 (4): 104–127.
Berg, Florian, Julian F. Koelbel, and Roberto Rigobon. 2022. “Aggregate confusion: The divergence of ESG ratings.” Review of
Finance 26 (6): 1315-1344.

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ESG and Global Investor Returns Study

ESG and Global Investment
Returns Study Results

33

ESG and Global Investor Returns Study

ESG and Global Investment
Returns Study Results
Methodology Overview
This section provides a brief overview of the methodology for the Kroll ESG and Global Investment Returns
Study (“ESG Returns Study”). The full methodology can be found in Appendix 1.
Introduction
Our objective with this inaugural study was to ascertain whether a relationship exists between acompany’s equity returns and its ESG rating. The ratings are used as a proxy of where a company is in its
journey to address risks stemming from ESG factors.
When estimating the value of a company or an investment, practitioners often make arbitrary or subjective
adjustments to discount rates (cost of capital) to capture different sources of risk. That can lead to underor overvaluation of an investment, particularly if not supported by theory or by empirical evidence.
From an asset pricing perspective, we try to quantify expected risk: can an investor expect different returns
to compensate for different ESG risks? Taking a systematic risk perspective (i.e., based on CAPM and otherasset pricing/risk models), the answer is not clear. As discussed in the previous section, some academics
will argue that ESG is a source of systematic risk (which should have a corresponding impact on cost ofcapital), while others will argue that relationship is absent. Of course, this presumes that ESG sources ofrisk are being fully captured in the projected cash flows—in that case, only systematic risks should bereflected in the cost of capital. What if they are partly (or totally) missing from the projected cash flows?
Can an adjustment be made to the discount rate to account for these ESG risks (or opportunities) that is
supportable?
One thing is certain: material flows of capital into or away from certain themes or types of investment will
have an impact on realized returns. That can lead to a gap between the returns that were expected (exante) versus what was realized (ex-post) for a given investment strategy. This is no different than what
we observe for other types of risk (e.g., equity risk premium, size premium).
In this first edition of our study, we wanted to ascertain whether there is empirical evidence that supports
the relationship between equity returns earned by a company and its ESG rating. The Kroll ESG Returns
Study is different from other studies owing to its sheer comprehensiveness: we examine the correlation
between company ESG ratings and returns for four geographic regions (World, North America, Western
Europe and Asia) and 12 countries/markets (Australia, Brazil, Canada, China, France, Germany, Hong Kong
SAR, India, Japan, South Korea, the UK and the U.S.). In addition, within some of these geographies, we
further scrutinize the results for 11 industries (as defined by the GICS® structure): Energy, Materials,

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ESG and Global Investor Returns Study

Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology,
Communications Services, Utilities and Real Estate.99
We plan on extending this study to analyze whether some of the results observed were due to certain firm
characteristics (e.g., size) or if the relationship observed in the 2013−2021 period can be expected tocontinue in the future.
Foundation of the ESG Returns Study – Selecting a Source for ESG Ratings
According to an analysis of SustainAbility, an ERM Group company, there were 600+ ESG ratings andrankings providers globally as of 2018. SustainAbility claimed that the number of providers had grownthrough the date of the report (March 2020).100 The analysis did not specify how many providers supplied
data to corporates versus funds, nor did it distinguish between ratings versus rankings. In addition, it
appears that this figure does not distinguish between providers that focus exclusively on one of the pillarsof ESG (e.g., environmental ratings) versus broader composite ratings. Nonetheless, the number ofproviders is clearly rather large, making it difficult to find a consensus between them. To be fair, some ofthese have been acquired and folded into existing ratings businesses, so there could be some overlap. In
fact, in a 2023 update to its survey, SustainAbility acknowledges that “[t]he ESG rating landscape has
undergone significant shifts and consolidation,” but it no longer provides an estimate of number ofproviders.101
In early 2021, we conducted an analysis of main providers of corporate ESG ratings to decide on whichsource to use for our analysis. We interviewed researchers at some of these providers to better understandtheir rating methodology. Ultimately, our decision tried to balance some of the following key elements:
1. Coverage period: a longer period of ratings availability was preferred, so that the returns over time
were more meaningful.
2. Coverage depth: the largest possible number of companies with an ESG rating that were publicly
traded in global markets (while also maximizing the coverage period (see above)).
3. Frequency of re-rating: ESG ratings should not be the same for an entire year for all companies in
the rating universe. While we acknowledge there is an element of stability in ratings, if an ESGrelated event is material to a company (e.g., controversy), its rating should be changed without
having to wait for the next annual review period.
4. Composite ESG ratings: The ratings provider must publish composite ESG ratings (i.e.,aggregating the ratings of each of the three pillars: environmental, social and governance).

99

100

101

The Kroll ESG Returns Study relies upon the GICS® structure as of the end of calendar year 2021 for industry classification
purposes. In 1999, MSCI and S&P Dow Jones Indices introduced the GICS®, consisting of 10 industry sectors, which was
expanded to 11 in September 2016 to include Real Estate. Effective March 17, 2023 (after market close), [continued on nextpage] some subindustry groups were reclassified from Information Technology to Financials. The ESG Returns Study does notincorporate these most recent GICS® changes.
SustainAbility, “Rate the Raters 2020: Investor Survey and Interview Results,” March 2020. Available here:
https://www.sustainability.com/globalassets/sustainability.com/thinking/pdfs/sustainability-ratetheraters2020-report.pdf.
SustainAbility, “Rate the Raters 2023: ESG Ratings at a Crossroads,” March 2023. Available here:
https://www.sustainability.com/globalassets/sustainability.com/thinking/pdfs/2023/rate-the-raters-report-april-2023.pdf.

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ESG and Global Investor Returns Study

5. Rating methodology: The rating conclusion for a company must be independent of whether or not
the company filled out an ESG survey by the ratings provider.
Based on the combination of these factors, we decided that MSCI was the best source of ESG ratings touse for the ESG Returns Study.102
Background on MSCI ESG Ratings
According to MSCI, its ESG ratings “aim to measure a company’s management of financially relevant ESG
risks and opportunities. [MSCI] use[s] a rules-based methodology to identify industry Leaders and
Laggards according to their exposure to ESG risks and how well they manage those risks relative topeers.”103 While individual investors may use MSCI ESG ratings to make investment decisions based on
personal values or in the pursuit of impact investing, MSCI is clear in stating that its ratings are designed
to enhance long-term returns and manage ESG financial risks of an investment.104 In other words, MSCIESG ratings support ESG integration into investment decisions.
MSCI’s ESG ratings trace their origin back to MSCI’s acquisition of RiskMetrics in 2010.105 RiskMetrics itself
had grown through a series of acquisitions, most notably Innovest in February 2009 and KLD in November
2009.106 KLD and Innovest combined became what is known today as MSCI ESG ratings. According toresearchers Robert G. Eccles et al, Innovest’s methodology strongly influenced MSCI ESG research.107
These co-authors report that MSCI decided against a merger of the then-existing ESG methodologies of
KLD and Innovest, opting instead to keep the latter’s Intangible Value Assessment (IVA) as the core
methodology on which to build what today is known as MSCI ESG ratings. Some components of KLD wereused to enhance the IVA-based ratings.
Nevertheless, the IVA ratings methodology (and the successor MSCI ratings) underwent significant
changes, making comparisons across time less meaningful.108 Because of this, as well as the significant
increase in coverage starting in 2012 (and more so in 2013), our analysis only captures MSCI ESG ratingsfrom 2013 onward. For perspective, Exhibit 7 shows the monthly average number of issuers that areincluded in MSCI’s ESG ratings database for the period of 2007−2021.109

102

103
104

105

105

107

108
109

Our decision was made in mid-2021. Subsequent to our decision, ratings coverage and methodologies may havechanged for the providers we analyzed.
“What is an MSCI ESG Rating?” Available here: https://www.msci.com/our-solutions/esg-investing/esg-ratings.
“What MSCI’s ESG Ratings are and are not.” Available here:
https://www.msci.com/our-solutions/esg-investing/esg-ratings/what-esg-ratings-are-and-are-not.
“MSCI Buys RiskMetrics,” Integrity Research Associates, March 1, 2010. Available here:
https://www.integrity-research.com/msci-buys-riskmetrics/.
KLD Research & Analytics, Inc. was formerly known as Kinder, Lydenberg, Domini & Co, named after its founders in 1988. KLD
was a major provider in the SRI index business. Innovest Strategic Value Advisors, Inc. was another major ESG research provider.
Other companies acquired by RiskMetrics included Centre for Financial Research and Analysis (CFRA) and Institutional
Shareholder Services (ISS), Inc., but both were disposed by MSCI in 2013.
Eccles, Robert G. and Lee, Linda-Eling and Stroehle, Judith, “The Social Origins of ESG?: An Analysis of Innovest and KLD,”
August 20, 2019. Available at SSRN: https://ssrn.com/abstract=3318225. These authors also indicated that even though MSCI
still provides KLD assessments, due to the changes in data collection, this “new” KLD data (post-MSCI acquisition) is not directlycomparable with historical KLD data from before 2010.
“Intangible Value Assessment (IVA) Rating History 2007–2012 – Updated September 2012,” MSCI ESG Research.
“MSCI ESG Ratings Time Series 2007–Present,” MSCI ESG Research LLC, April 2023.

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ESG and Global Investor Returns Study

Exhibit 7: Monthly Average Number of Issuers Included in the MSCI ESG Ratings Time Series

MSCI ESG ratings are further categorized from Leader (AAA, AA), to Average (A, BBB, BB), to Laggard (B,CCC), as shown in Exhibit 8. As previously mentioned, MSCI uses a rules-based methodology to identify
industry Leaders and Laggards according to their exposure to ESG risks and opportunities and how theseare managed compared to peers. In other words, the MSCI ESG ratings are not absolute. Rather, companies
in each industry are ranked relative to each other based on how ESG risks and opportunities affect theirrespective bottom lines. In addition, MSCI generally ranks companies on a bell-shaped curve, which results
in a much smaller proportion of companies rated at each end of the rating scale (i.e., as either AAA or CCC(the “tail” ends of the curve)).110
Exhibit 8: Classification of MSCI ESG Ratings by Letter Grade and as Leader, Average and Laggard
AAAAA

LeaderA company leading its industry
in managing the mostsignificant ESG risks andopportunities.

110

A

BBB

BB

Average
A company with a mixed or
unexceptional track record ofmanaging the most significant
ESG risks and opportunities
relative to industry peers.

B

CCC

Laggard
A company lagging its industry
based on its high exposure andfailure to manage significant
ESG risks.

Source: “What is an MSCI ESG Rating?” and “How does MSCI ESG Ratings work?”, both accessed on June 29, 2023. Available
here: https://www.msci.com/our-solutions/esg-investing/esg-ratings.

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ESG and Global Investor Returns Study

Different ESG risks and opportunities can impact different industries (e.g., water usage may not be material
for some industries), but corporate governance is considered by MSCI to be of universal importance, andtherefore examined for all industries. Exhibit 9 outlines the methodological framework that MSCI uses
under each of the three pillars: E, S and G. There were 10 “themes,” and 35 “key issues” at the end of 2021.
Within each of these key issues, various metrics will be used to measure a company’s exposure or handlingof those issues.111
Exhibit 9: MSCI ESG Key Issues Framework

While a naïve review of MSCI ESG ratings might overly focus on environmental issues (the E pillar), that is
not how MSCI determines an individual company’s composite (or overall) ESG rating. For example, one
may be tempted to think that a company such as Tesla, a leader in the electric vehicle market, would earn
a top AAA rating due to its superior environmental credentials in its industry segment. However, when theother two pillars (social and governance) are considered, Tesla is not always classified at the top of the
rankings, as illustrated in Exhibit 10. The Kroll ESG Returns Study examined the relationship of composite(or overall) ESG ratings and stock returns, rather than focusing on just one of the pillars within ESG.

111

Source: “ESG Ratings Methodology,” MSCI ESG Research LLC, December 2021. MSCI changes its ESG key issues from time totime. The current key issues may differ from those prevailing back in 2021.

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ESG and Global Investor Returns Study

Exhibit 10: Tesla MSCI ESG Ratings Over Time (2012–2021)
8

AAA7

AA6

A5

4
BBB

BB3

B2
CCC1

0

Source: MSCI ESG Ratings

According to MSCI, to arrive at a final ESG rating, the weighted average of individual environmental andsocial key issue scores and the governance pillar score is calculated and then normalized relative to the
ESG rating of industry peers. After MSCI committee-level overrides are factored in (if any), each company’s
numerical Final Industry-Adjusted Score corresponds to a letter rating between best (AAA) and worst(CCC).
Universe of Companies in the ESG Returns Study
The time horizon used in this study is January 2013−December 2021 (i.e., 108 months or 9 years). To be
included in the study, a company needed to have publicly traded common shares (i.e., private companies,
as well as preferred and other hybrid securities were eliminated in our screening process). In addition, acompany needed to have a minimum of one month of market capitalization (“market cap”) data in the
December 2012−November 2021 period and one month of total returns in the January 2013−December
2021 period. Overall, there were over 13,000 companies that met the screening criteria and were includedin the analysis over the study period. However, the actual number of companies in each month varied byyear and by region, as illustrated in Exhibit 11. Coverage increased significantly over time, as MSCI
expanded the universe of companies for which it issued an ESG rating. For a more complete description of
the procedures undertaken to arrive at the final data set, refer to Appendix 1.
Exhibit 11: Number of Companies Included in the Study – Summary Statistics
Jan 2013

Dec 2021

January 2013−December 2021

Nr. of Cos.

Nr. of Cos.

Average

World

4,759

10,670

7,512

7,151

10,698

4,759

North America

2,305

3,033

2,723

2,742

3,062

2,305

Asia

1,111

4,197

2,233

1,794

4,202

1,111

688

1,929

1,432

1,572

1,934

687

Regions

Western Europe

Median

Max

Min

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ESG and Global Investor Returns Study

General Procedures to Calculate Returns by ESG Rating
We built investment portfolios comprised of companies rated under each of MSCI’s seven individual ESG
rating categories (i.e., AAA, AA, A, BBB, BB, B and CCC) and aggregate ratings (i.e., Leaders, Average andLaggards) for each geographic region and country/market. These portfolios were rebalanced monthly.
We then constructed indexes to calculate the ending value of each portfolio at the end of December 2021,
if USD 1 had been invested at the beginning of the study period (i.e., December 2012). The indexes usedin this ESG Returns Study were created by Kroll using market-capitalization-weighted (“cap-weighted”)
index construction techniques like those used to create the S&P 500 Index and other well-known indexes,
including the MSCI USA Index. Total returns (i.e., dividend plus capital appreciation) for each portfolio were
calculated in U.S. dollars to allow for comparison across geographies. The total return over the full study
period was then annualized by computing the compound annual growth rate of each portfolio.
For more detailed procedures, refer to Appendix 1.

Study Results – Highlights
Key Findings
•
•

•

•

•

•

Global portfolios of companies with higher ESG ratings earned a better annual compound return,when compared to portfolios of worse-rated companies over the 2013−2021 period.
This relationship generally holds for the major geographic regions and for most countries/markets
in the study. Specifically, with the notable exceptions of Brazil and Germany, 10 out of the 12
countries/markets analyzed individually saw companies rated as ESG Leaders outperform
Laggards (Australia, Canada, China, France, Hong Kong SAR, India, Japan, South Korea, the UK
and the U.S.).
In the case of Brazil, only companies considered Laggards from an ESG rating perspective
managed to earn a positive annual return during this period (in USD terms). In Germany, while allcompanies saw a positive annual return, the performance of lower-rated companies far
outweighed that of the leading ESG companies.
In the U.S., the country with the largest number of rated companies, the ESG Leaders earned anannual compound return of 20.3%, compared to the 13.9% annual compound return earned by
Laggard companies. This represents an almost 50% premium in terms of relative performance byleading ESG companies.
Industries within the World portfolio also saw ESG Leaders generally outperform Laggards, except
for Consumer Staples and Health Care. When industries were analyzed within regions or individual
countries/markets, the relationship between returns and ESG ratings was less pronounced. In
some cases, a pattern is not even discernable, meaning that ESG does not seem to be a driver ofinvestment decisions for those country/industry combinations.
Focusing on U.S. industries, companies with the best ESG ratings do not always come out on top.
For example, U.S. ESG Leaders outperformed Average- and Laggard-rated companies in only fiveof the 11 industries examined (see Exhibit 12). In the case of U.S. Consumer Discretionary,Consumer Staples and Industrials, companies with an Average rating outperformed both Leadersand Laggards, although the latter still did worse than leading ESG companies. On the other hand,
U.S. Laggards in the Energy, Health Care and Communications Services sectors significantly
outperformed their better-rated counterparts.

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ESG and Global Investor Returns Study

Exhibit 12: Companies with the Best ESG Ratings Do Not Always Come Out on Top(U.S. Company Results)
Industries where Leaders outperformed Average- and Laggard-rated companies• GICS 15 - Materials• GICS 40 - Financials• GICS 45 - Information Technology• GICS 55 - Utilities• GICS 60 - Real Estate
Industries where Average-rated companies outperformed Leader- and Laggard-rated companies,
but Leaders still outperformed Laggard-rated companies• GICS 20 - Industrials• GICS 25 - Consumer Discretionary• GICS 30 - Consumer Staples
Industries where Laggard-rated companies outperformed Leader- and Average-rated companies• GICS 10 - Energy• GICS 35 - Health Care
• GICS 50 - Communication Services

Caveats••••

As more scrutiny is placed on what constitutes an ESG-focused investment, capital allocations
may change the relationship observed in our study.
Because there are fewer companies with an ESG rating in some countries/industries, the results
are not as meaningful as those for broader geographic regions. This is also the case with the evenmore granular results for the seven individual ESG rating categories (i.e., AAA, AA, A, BBB, BB, B
and CCC).
The study only covered companies that had an ESG rating assigned by MSCI. It did not cover theentire universe of publicly traded companies around the world.
Our analysis relies on ESG rating assessments made by MSCI. Using other ESG rating providers
as a source could have resulted in different outcomes.

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ESG and Global Investor Returns Study

Results by Rating and Industry Shown in the Study
The sheer volume of data from the results obtained for the various combinations of geographic regions,countries, industries and ratings led us to limit the discussion contained in this static version of the ESG
Returns Study. Specifically, we elected to display the overall results for the World, North America, Western
Europe, and Asia regions, but not for individual countries/markets. Instead, we provided some highlights
of individual countries/markets within each respective geographic region, when appropriate. Because there
was insufficient data to create a Latin America region, Brazil results were highlighted only as part of the
key findings above. Australia was the other major economy not discussed as part of a geographic region.
Had we attempted to create an Oceania region, it would be overwhelmingly comprised of Australiancompanies, which render the regional results meaningless. Furthermore, industry results were only
displayed in some cases, when discussing certain patterns observed within the World portfolio. Readersof the ESG Returns Study have the ability to analyze the results for a variety of regions, countries/markets
and industries, by accessing the dynamic version of our report.112

112

Full interactive report available here: www.kroll.com/esg-global-investor-returns-study.

42

ESG and Global Investor Returns Study

Global Results by Rating and Industry
World Portfolio by ESG Rating
As illustrated below in Exhibit 13, our study reveals that companies with a Leader ESG rating earned asignificantly higher cumulative total return than companies with a Laggard rating over the 2013−2021
period. We also show a comparison to the cumulative (total) returns earned by MSCI ACWI IMI Index; atypical benchmark used for global stock markets. Although the comparison is not completely on an applesto-apples basis (as the companies included in the ESG Returns Study overlap but are not the same as
those in the index owned by MSCI), companies with the highest ESG ratings also outperformed the MSCIACWI IMI Index during this period.
Exhibit 13: World – Aggregate MSCI Ratings (Leader, Average, Laggard) vs. MSCI ACWI IMI Index
Cumulative Return (USD 1 Invested in December 2012)
January 2013–December 2021
$3.50

$3.00

World (Leader)World (Average)

World (Laggard)

MSCI ACWI IMI GR USD
$2.99
$2.75

$2.50

$2.00

$2.53
$2.11

$1.50

$1.00

$0.50

$0.00

43

ESG and Global Investor Returns Study

Exhibit 14 converts the data for the World’s Leader, Average and Laggard portfolios into compound annual
returns for the 2013−2021 period, as it is more intuitive to analyze.113 The World’s ESG Leaders earned
an annual return of 12.9%, which compares to an 8.6% annual return earned by Laggard companies. This
represents an approximately 50% premium (= 12.9% / 8.6% – 1) in terms of relative performance by ESG
Leader companies.
Exhibit 14: World – Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader941

1,486

Average

4,780

6,621

Laggard

1,791

2,563

Total

7,512

10,670113

For avoidance of doubt, all returns reported in the ESG Returns Study are compound annual returns (also known as geometricaverage returns).

44

ESG and Global Investor Returns Study

This relationship also holds at a more granular rating level. As Exhibit 15 demonstrates, when analyzing
the results for the seven ESG rating categories (AAA, AA, A, BBB, BB, B and CCC), companies with abetter (higher) rating have generally outperformed those companies with worse (lower) ratings, although
the relationship is not completely linear.
Exhibit 15: World – Compound Annual Return by Individual ESG Rating
January 2013–December 2021

Company Count

Company Count

Monthly Average
2013−2021

December 2021

AAA

198

245

AA

743

1,241

A

1,270

1,981

BBB

1,747

2,411

BB

1,764

2,229

B

1,390

1,845

CCC

401

718

Total*

7,512

10,670Rating* Differences due to rounding.

45

ESG and Global Investor Returns Study

World Portfolio by Industry
The full interactive report containing additional data for the various industries analyzed, can be found here.
Exhibit 16 shows an example of how global companies performed over the study period based on theiraggregate rating. Specifically, Information Technology companies enjoying a Leader rating earned a higher
average return (23.5%) than those with a Laggard rating (18.4%). This compares to the overall Information
Technology performance of 22.1% annual average return.
Exhibit 16: World – Information Technology Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader80

134

Average553

733

Laggard

181

341

Total

815

1,208

* Differences due to rounding.

Some market analysts claim that ESG investing’s outperformance in some periods is attributable to theoverweighting of technology stocks.114 Prior to the 2022 rout in tech stocks (which was primarily
attributable to a significant rise in global interest rates), Information Technology had been generally
outperforming other industries globally. However, we find that the outperformance by the best ESG-rated
companies is not limited to the tech space. Exhibit 17 shows an example of how highly rated companies
in other industries have also outperformed their peers globally.

114

For example, see Wenzel, Fernanda, “Behind the buzz of ESG investing, a focus on tech giants and no regulation,”
Mongabay, April 30, 2021. Available here: https://news.mongabay.com/2021/04/behind-the-buzz-of-esg-investing-a-focuson-tech-giants-and-no-regulation/. Also, see “Tech Stocks Slump is Triggering the Withdrawn of ESG Funds: Here's Why,” SGAnalytics, May 26, 2022. Available here: https://us.sganalytics.com/blog/tech-stocks-slump-triggering-withdrawn-of-esgfunds/.

46

ESG and Global Investor Returns StudyIn this case, Leaders in Communication Services have earned 9.2% on average during the 2013−2021
period, which compares to 7.5% for Laggard companies (a relative premium of approximately 23%, or
9.2% / 7.5% – 1).
Exhibit 17: World – Communication Services Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader

52

68

Average

225

340

Laggard

85

135

Total

361

543

* Differences due to rounding.

47

ESG and Global Investor Returns Study

Having said that, the relationship is not always linear between ratings and return performance. As shownin Exhibit 18, Real Estate companies with an ESG Leader rating earned a higher average return (9.8%)
than those with a Laggard rating (6.2%). However, companies with an Average ESG rating earned
essentially the same average return (6.1%) as Laggards. This is an example of an industry where there isno discernable difference in returns between different ESG ratings, except for the outperformance of toprated companies.
Exhibit 18: World – Real Estate Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader

52

76

Average287

466

Laggard

167

232

Total

506

774

48

ESG and Global Investor Returns Study

Finally, Exhibit 19 illustrates one of the two industries globally where companies with the worst ESG
ratings outperformed their better-rated counterparts. In this case, Laggard companies in Consumer Staples(the other example being in Health Care) earned a higher average return (10.9%) than the average returnachieved by both Average (8.2%) and Leader (7.4%) companies in the 2013−2021 period.
Exhibit 19: World – Consumer Staples Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader

71

114

Average297

411

Laggard

115

178

Total

483

703

* Differences due to rounding.

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ESG and Global Investor Returns Study

Highlights by Geographic Region
The full interactive report containing additional data for various geographies and industries analyzed canbe found here. Some of the figures cited can only be found in the full interactive report.
The following are selected highlights of the results obtained for North America, Western Europe, and Asia.

50

ESG and Global Investor Returns Study

North America
•

•

•

•

•

The North America region encompasses Canada and the U.S., but the results are significantly
skewed towards the performance of U.S. companies. This is a result of data availability: as
discussed in Appendix 1, almost 89% of the observations in North America are from U.S.-based
companies.
North American companies with better (higher) ESG ratings earned a higher annual average
return, when compared to portfolios of worse (lower) rated companies during the 2013−2021
period (see Exhibit 20). This was the case both in Canada and in the U.S.
U.S. ESG Leaders outperformed Laggards by a relative premium of 46% (= 20.3% / 13.9% – 1). In
Canada, companies with a Leader rating earned almost triple (9.2%) the average return achievedby Laggards (3.2%). Nevertheless, the relatively small number of Canadian Laggard companies
may have distorted the results. In general, the proportion of ESG Leaders is higher in Canada thanin the U.S. at 18% versus 9%, respectively.
North America industry performance followed the aggregate trend, with better-rated companies
generally outperforming worse-rated ones. Health Care was a notable exception, where Laggards
earned a significantly higher return than companies with better ratings. Laggard companies inEnergy also outperformed, but this was an industry with a very small number of companies rated
as Leader, which may have skewed the results.
The relationship between ESG ratings and performance is not linear when reviewing individual
industries within North America. For example, there were four industries where companies with
an Average rating outperformed both Leaders and Laggards: Consumer Discretionary, Consumer
Staples, Financials and Industrials. In all these instances, however, Leaders still outperformed
Laggards.

51

ESG and Global Investor Returns Study

Exhibit 20: North America Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader

181

312

Average

1,904

2,198

Laggard

639

523

2,723

3,033

Total
* Differences due to rounding.

52

ESG and Global Investor Returns Study

Western Europe
•

•

•

•

•

European companies with better (higher) ESG ratings earned a higher annual average return, whencompared to portfolios of worse (lower) rated companies during the 2013−2021 period (seeExhibit 21).
European companies are further along in their ESG journey, according to MSCI. European
companies were generally better rated by MSCI than in other regions. For example, in December
2021, nearly a third of Western European companies were rated as ESG Leaders and only 6% (=
122 / 1,929) were considered Laggards. In contrast, only 10% of North America and 6% of Asia
companies enjoyed a Leader rating. North America and Asia also saw a greater proportion of
Laggards, at 17% and 38%, respectively.
Industry performance followed the aggregate trend, with better-rated companies generally
outperforming lower-rated ones. Information Technology was a notable exception, where
Laggards earned a significantly higher return than companies with better ratings. This contradicts
the general perception that most of the positive ESG performance can be attributed to techcompanies. Lagging companies in Consumer Staples and Communication Services also
outperformed, but these were industries with a very small number of companies in this rating
category, which may have distorted the results.
Only three countries in Western Europe had enough data to be discretely analyzed: France,
Germany and the UK. In contrast to the general trend, German companies with lower ESG ratings
outperformed those with higher ratings, but again the small number of companies in the Laggard
rating category may have distorted the results.
France and the UK had an impressive number of companies rated as Leaders by MSCI, at 37% and41%, respectively, as of December 2021.

53

ESG and Global Investor Returns Study

Exhibit 21: Western Europe Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader409

655

Average

897

1,152

Laggard

126

122

1,432

1,929

Total

54

ESG and Global Investor Returns Study

Asia
•

•

•

•

115

Asia companies with better (higher) ESG ratings earned a higher annual average return, whencompared to portfolios of worse (lower) rated companies during the 2013−2021 period (seeExhibit 22).
Asia companies are further behind in their ESG journey when compared to other regions, according
to MSCI. Asia companies were generally worse rated by MSCI vis-à-vis other regions. For example,
in December 2021, 38% (= 1,591 / 4,197) of Asia companies were rated as ESG Laggards andonly 6% (= 266 / 4,197) were considered Leaders. In contrast, North America and Western Europe
saw a smaller proportion of Laggards, at 17% and 6%, respectively. It is notable that the numberof MSCI ESG-rated companies has increased significantly over the study period (more so than inother regions), with the company count in December 2021 almost double the 2013−2021 average.
This may also be partly a function of the increase in publicly traded companies in the Asia region
over this period.115
Industry performance in Asia was mixed. While better-rated companies generally outperformed
lower-rated ones, that was not the case with Energy, Consumer Staples, Health Care and Utilities.
Regarding Energy and Utilities, the very small number of companies in the Leader category may
have skewed the results. Information Technology stood out as an outperformer, with Leaders
earning more than double the average annual returns realized by Laggards (22.5% versus 10.5%
in USD terms).
There were several markets in Asia with enough data to be discretely analyzed: China, Hong Kong
SAR, India, Japan and South Korea.

For example, see Guptan, Rahul, Kaya Proudian and Jessica Zhou, “Asia-Pacific’s IPO market outshines,” White &Case, April 27, 2023. Available here: https://www.whitecase.com/insight-our-thinking/global-ipos-asia-pacific-ipo-marketoutshines. Also, see Kohli, Akshay, Amit Gandhi, Anand Veeraraghavan, Eugene Khoo, and Nikhil Khaitan, “The 2023 AsiaPacific Value Creators Report – A Decade of Strong Performance,” BCG, April 2023. Available here: https://webassets.bcg.com/64/d8/8b18f8de4f919a5f8503a7c4044b/bcg-the-2023-asia-pacific-value-creators-report-april-2023.pdf.

55

ESG and Global Investor Returns Study••

China and South Korea had a disproportionately high number of companies rated in the Laggard
category, at respectively 56% and 69% as of December 2021. Nonetheless, Laggard companies
still underperformed their better-rated counterparts in both countries.
Companies with a Leader rating earned higher annual average returns than Laggards in all theother spotlighted markets (Hong Kong SAR, India and Japan).

Exhibit 22: Asia Compound Annual Return by Aggregate ESG Rating
January 2013–December 2021

Company Count

Company Count

RatingMonthly Average
2013−2021

December 2021

Leader181

266

Average

1,283

2,340

Laggard

769

1,591

2,233

4,197

Total

56

ESG and Global Investor Returns Study

Future Research
In this inaugural version of the Kroll ESG Returns Study, we analyzed the differences in performanceof portfolios comprised of companies with different MSCI ESG ratings without controlling for any
exogenous factors. Understanding whether having a good or bad ESG rating conveys any information
about future company performance will require additional research.
The Relationship Between Company Size, MSCI ESG Ratings and Performance
One potential area of future research is the relationship between company size (as defined by market cap),
MSCI ESG ratings, and performance (i.e., returns).116
For example, over the January 2013−December 2021 time horizon in the ESG Returns Study, the median(i.e., “typical”) monthly market cap of U.S. companies that had an ESG rating of Leader (a categorycomprised of the two best MSCI ESG ratings, AAA and AA) was over five times the market cap of U.S.
companies that had an ESG rating of Laggard (a category comprised of the two worst MSCI ESG ratings,
B and CCC).117
The study found that Leaders outperformed Laggards in the U.S. by a 20.3% to 13.9% margin, but it isalso true that large stocks generally outperformed small stocks over the 2013−2021 period. For example,
the Center for Research in Security Prices (CRSP) portfolio 1-2, which represents approximately the top
20% of the U.S. market, outperformed the CRSP portfolio 9-10, which represents approximately thebottom 20% of the market, by a 17.0% to 14.8% margin over the 2013−2021 period.118 Company size isan example of an exogenous factor that may have contributed to the outperformance of Leaders over
Laggards.
Double Sorts
To further explore a potential relationship between company size, ESG ratings and performance, we will
create and measure the performance of portfolios based on the double sorting of size and MSCI ESG rating.
For example, examination of the performance of portfolios comprised of Leader companies that have beenfurther sorted by size (e.g., Leader companies that are also large, mid-cap, low-cap, or micro-cap
companies) might shed light on the relative strength of the size and ESG forces driving returns.

116

117

118

Of the 12 countries examined individually in this study, the U.S. has the largest amount of MSCI ESG data available and istherefore used here for example purposes. The U.S. accounts for 32.2% of all calculation months in this study (Japan is a distantsecond, at 9.5%).
The median monthly market cap of U.S. “Leaders” was USD 7.577 billion, whereas the median monthly market cap of U.S.
“Laggards” was USD 1.492 billion.
CRSP is an affiliate of the University of Chicago Booth School of Business. CRSP creates decile portfolios for all common stocks
listed on the NYSE, NYSE MKT, and NASDAQ National Market (excluding Unit Investment Trusts, Closed-End Funds, REITs,
Americus Trusts, foreign stocks and American Depositary Receipts). Individual decile portfolios are created for each exchangegroup, the largest being in decile 1 and the smallest in decile 10. In addition to each decile portfolio, returns are calculated forthe following: CRSP 1-2, CRSP 3-5, CRSP 6-8, CRSP 9-10, CRSP 6-10 and CRSP 1-10. For more information, visit:https://www.crsp.org/products/documentation/crsp-cap-based-portfolios-0.

57

ESG and Global Investor Returns Study

Regression Analysis of ESG Rating and Subsequent Return
A big question for investors is whether current ESG ratings can be used to “predict” subsequent returns.
One way of doing this might be to do a multiple regression that uses ratings or ratings categories (e.g.,
AAA through CCC, or Leader, Average, Laggard) as the independent variables (i.e., the variables doing thepredicting), and all possible subsequent 3-, 6-, 9-, and 12-month returns of each of the companies in the
study as the dependent variable (i.e., the effect being predicted).
Considering that over 13,000 companies were included in the analysis in this study over a span of 108
months, the number of matched sets of independent variables and dependent variables is easily in thehundreds of thousands. The results of the multiple regression could shed light on whether there is asignificant relationship between ESG ratings and subsequent returns.
However, whether investors can make money by using ESG ratings to make investing decisions is not theend of the story, because everything in investing (and analysis in general) is a “compared to what?”. The
real question, therefore, is whether investors can make more money by using ESG ratings to make investing
decisions compared to what they would have made employing alternative methodologies for investing.
Kroll’s future analysis will attempt to answer both questions.
Cost of Capital
If a variable does carry information about prospective returns, it can potentially be used in the calculationof cost of capital estimates. Cost of capital is used to discount the expected future economic benefits (orincome) associated with the ownership of an investment to their present value. In essence, cost of capitalis one of the inputs needed to estimate the value of an investment.
In this inaugural version of the Kroll ESG Returns Study, we reported the initial comparative performance
results of portfolios comprised of companies with various combinations of attributes (e.g., region, country,
MSCI ESG rating, industry). The returns associated with these portfolios can potentially be used to calculate“betas.” Betas measure the systemic risk of a stock (specifically, the tendency of changes in a stock’s priceto correlate with changes in a specific benchmark market index). Realized performance by ESG rating could
then be analyzed after adjusting for the betas of each of the portfolios to arrive at beta-adjusted realized
return.

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ESG and Global Investor Returns Study

Appendix 1: Study Methodology
Purpose of the Kroll ESG and Global Investment
Returns Study
The Kroll ESG and Global Investment Returns Study (the “ESG Returns Study”) examines the relationshipbetween historical returns of publicly traded companies and their ESG ratings globally. The purpose of thisstudy is to analyze the differences in performance (if any) of portfolios (i.e., indexes) comprised ofcompanies with different MSCI ESG ratings.
For example, an index can be constructed from companies from a specific country (e.g., the UK) in a specificindustry (e.g., GICS 20 – Industrials) with a specific MSCI ESG rating (e.g., AAA, the best rating). The
performance of this index can then be compared to the performance of an index constructed of UK
companies in GICS 20 – Industrials, but with the worst MSCI ESG rating (CCC).
We examined a universe of over 13,000 companies across a variety of geographies and industries aroundthe globe. Our goal is to ascertain if an investment strategy focused on companies with a better rating
would result in a superior return performance.
Time Horizon
The time horizon over which the ESG Returns Study analyzes indexes comprised of companies withdifferent composite MSCI ESG ratings is January 2013−December 2021 (i.e., 108 months or nine years).
Exhibit A1-1: Monthly Average Number of Issuers Included in the MSCI ESG Ratings Time Series

Source: MSCI ESG Research LLC, “MSCI ESG Ratings Time Series 2007-Present,” (April 2023).

59

ESG and Global Investor Returns Study

MSCI has ESG ratings data from January 2007 to the present (monthly), but Kroll selected January 2013
as the start date of its ESG study instead of an earlier date for two main reasons: (i) there was a significant
change in MSCI’s ESG rating methodology in January 2012119, and (ii) MSCI’s company coverage increased
significantly starting in 2013 (see Exhibit A1-1).

Sources of Data
MSCI
The following data fields in the MSCI ESG ratings database were used in our analysis:120,121,122
1. ISSUER_NAME: The name of a company.
2. ISSUER_ISIN: International Securities Identification Number (ISIN). An ISIN is a unique number
associated with a security (e.g., a “stock” or a “bond,” etc.)
3. ISSUERID: Issuer Identifier. The ISSUERID is a unique identifier at the company level. An ISSUERID
may have several ISSUER_ISINs associated with it.
4. ISSUER_CNTRY_DOMICILE: The country/market with which a company is domiciled per the MSCICountry Classification Standard.123
5. IVA_INDUSTRY: The industry in which a company operates. Industries in the MSCI ESG
framework are defined by the GICS®.124
6. IVA_RATING_DATE: The date of the most recently completed ESG ratings review and assessment
for that issuer by MSCI.
7. AS_OF_DATE: The date that new issuer data was collected and published.
8. IVA_COMPANY_RATING: The overall ESG rating for a company expressed as rating between
best (AAA) and worst (CCC).125

119
120
121

122

123

124
125

Source: MSCI ESG Research LLC, “MSCI ESG Ratings Time Series 2007−Present,” (November 2020), page 8.
To learn more about MSCI ESG ratings, visit https://www.msci.com/zh/esg-ratings.
MSCI provided its ESG data to Kroll in 10 individual Excel spreadsheets: “ESG Ratings Timeseries Expanded 2007 to 2012.xlsx,”
plus nine additional spreadsheets for each year from 2013 through 2021 (referred to as “the MSCI ESG database” in this study).
A total of 240 unique data fields were in the spreadsheets provided to Kroll by MSCI. Some datapoints are available across all
years, whereas other data fields are not. The 10 datapoints used in the ESG Returns Study were available across all years.
The MSCI Country Classification Standard covers over 35,000 securities across the MSCI Developed, Emerging and FrontierMarkets and is updated quarterly. See “MSCI Global Investable Market Indexes Methodology,” May 2021, available at:https://www.msci.com/documents/1296102/1330218/MSCI-Country-Classification-Standard-cfs-en.pdf
and https://www.msci.com/eqb/methodology/meth_docs/MSCI_GIMIMethodology_May2021.pdf.
GICS® is the global industry classification standard jointly developed by MSCI and S&P Global.
A complete list of all overall MSCI ESG ratings is as follows, from best to worst: AAA, AA, A, BBB, BB, B and CCC.

60

ESG and Global Investor Returns Study

Refinitiv:126,127••

Monthly market capitalization (“market cap”) in U.S. dollars by individual company.
Monthly total returns in USD by individual company.128

Company Set Selection
Screen 1: Market Caps and Total Returns
All securities (at the ISIN level) that did not have at least one month of market cap data from December
2012−November 2021129 and at least one month of total returns from January 2013−December 2021
were eliminated.
Screen 2: Company Security TypeFor purposes of our analysis, we were only focused on the returns realized by common stocks. We used
Refinitiv to help us identify the types of securities issued by each company (or issuer), to eliminate thosethat did not resemble a common stock instrument. Based on our analysis, the securities that were included
or excluded in the analysis—identified by their ISIN and listed alphabetically by their Thomson ReutersClassification Scheme (TRCS) code—are listed in Exhibit A1-2.
Exhibit A1-2: Types of Securities Included and Excluded in the ESG Returns Study130
Included
TRCS CodeBDR
CEDEARCHESSDEPOSITSHSFULLPAID
ORD
STAPLEDADRDEPOSITSHS

126

127

128

129

130

Description of TRCS CodeBrazilian Depository Receipts
Argentinian Depository Receipts
CHESS Depository Interests
Depository Shares
Fully Paid Ordinary Shares
Ordinary Shares
Stapled Securities
American Depository Receipts
Depository Shares

Refinitiv, a London Stock Exchange Group (LSEG) business, is one of the world’s largest providers of financial markets data andinfrastructure. To learn more about Refinitiv, visit: https://www.refinitiv.com/en.
The ESG Returns Study uses market cap and total return data expressed in USD, regardless of companies’ country trading
currency to: (i) simplify the analysis, and (ii) enable the comparison of results across regions and countries.
“Total Return” consists of three components: (i) price (i.e., capital appreciation) returns, (ii) income returns (e.g., dividends), and(iii) reinvestment (e.g., of dividends) returns.
The ESG Returns Study creates indexes over the time horizon January 2013−December 2021. Market cap data was lagged one
month in the formation of indexes to avoid double counting returns; therefore, monthly market caps are needed over the time
horizon December 2012−November 2021. See the section entitled “Index Construction Methodology” for more information.
Thomson Reuters Classification Scheme (TRCS) is a legacy terminology that Refinitiv still uses. Thomson Reuters and private
equity funds affiliated with Blackstone sold Refinitiv to the LSEG plc in January 2021. To learn more about the transaction, visit:https://www.prnewswire.com/news-releases/thomson-reuters-announces-closing-of-sale-of-refinitiv-to-london-stockexchange-group-301217919.html. The Refinitiv TRCS code for each ISIN was retrieved from the Refinitiv database along withthe monthly market caps and monthly total returns. A TRCS code is the identification used for each security as defined by theThomson Reuters classification system.

61

ESG and Global Investor Returns Study

Excluded
TRCS CodeNA
CAPSECCEF
CPR
CRTGUACUM
DEBENT
DEFER
DRC
DVR
ELN
ENHTRUSTGENUS
INVCERT
ORDSUBRPART
PARTPRFPREFERRED
PRF
REDEEM
RTS
SAVE
UNT

Description of TRCS CodeNA
Capital Securities (New York Stock Exchange (NYSE))
Closed-Ended Fund
Convertible Preference Shares
Guarantee Certificates
Cumulative Preference Shares
Debenture
Deferred Shares
Depository Receipt
Differential Voting Rights Shares
Equity-linked Note
Enhanced Trust Preferred Securities (NYSE)
Genussscheine
Investment Certificates
Ordinary Subscription Receipts
Participation
Participating Preference Shares
Preferred Shares
Preference Shares
Redeemable Preference Shares
RightsSavings Shares
Unit

Source of security descriptions: Refinitiv. Analysis by Kroll.

Screen 3: Multiple Securities Issues
We identified over 200 cases where multiple ISIN numbers (MSCI ESG datapoint ISSUER_ISIN) wereassociated with the same issuer (i.e., company) identifier (MSCI ESG datapoint ISSUERID).131 Each of thesecases was reviewed and resolved individually using information and data from the S&P Capital IQ
platform.132

131

132

These cases were rare in the context of the overall company universe (the approximately 200 cases represented less than 1.5%of the 13,000+ total companies remaining after Screen 1 and Screen 2).
The S&P Capital IQ platform is a product offered by S&P Global Market Intelligence, which is a division of S&P Global.

62

ESG and Global Investor Returns Study

These cases primarily fell into three categories (from largest number of cases to smallest number ofcases):133
1) ISINs that had been misidentified during the process of applying Screen 2. For example, securities
that passed Screen 2 only because they had been mislabeled by Refinitiv as a common equity,when they were a type of bond or preferred equity. These misidentified securities were deleted.
2) Companies that had issued multiple common equity securities, which needed to be aggregated for
purposes of computing market cap. This can happen with dual-class-share structures, for example.
In these cases, the monthly market caps of the individual securities were summed, and a weighted
average (by market cap) of the total returns of the individual securities was calculated.134
3) ADRs and common equities representing the same entity trading concurrently (in different
exchanges) or sequentially.135 To avoid “double counting” of the same company, in these cases a
decision was made to determine which security to keep in the analysis (typically, the security withthe most history and/or quality of market caps and total returns was kept).
Screen 4: “Staleness” of Ratings
Although MSCI typically does an annual in-depth review of companies, there were a small number of
instances in which companies were not reviewed at least annually. To ensure that the ratings used in the
ESG Returns Study were not “stale”, instances in which the difference between the most recent rating date
and the publication date associated with the most recent rating date was greater than 24 months were
eliminated.136
Applying Screens 1−4 above resulted in a company set of 13,256 companies. Note that not all companies
are present in the same month. In other words, there is no single month where all 13,256 companies areincluded. Even though new companies are added to the dataset over time by MSCI, there will be others
that will disappear, either because MSCI ceases to assign an ESG rating or due to a variety of other reasons(e.g., company was acquired, filed for bankruptcy, or taken private).

133

134

135

136

There was a small number of cases that did not fall into these three categories. For example, there were several cases of duplicate
entries. In such instances, one of the occurrences was simply deleted.
Cross-checks were done to ensure that the aggregation or sum of the market caps of these securities matched or approximatedthe monthly total market caps for the overall company reported in S&P Capital IQ.
Officially, an ADR is a negotiable certificate that evidences an ownership interest in American Depositary Shares (ADSs) which,in turn, represent an interest in the shares of a non-U.S. company that have been deposited with a U.S. bank. It is similar to a
stock certificate representing shares of stock. The terms ADR and ADS are often used interchangeably by market participants.
As originally created, ADRs are traded in U.S. dollars and cleared through U.S. settlement systems, allowing ADR holders to
avoid having to transact in a foreign currency.
Source : https ://www.sec.gov/investor/alerts/adr-bulletin.pdf. Having said that, there are other non-U.S. markets that now may
use the term ADR conceptually to designate foreign securities that are traded in the home market in the home (local) currency.
This was accomplished by calculating the following: [(MSCI ESG datapoint AS_OF_DATE) – (MSCI ESG datapointIVA_RATING_DATE)]. AS_OF_DATE and IVA_RATING_DATE represent the publication date and most recent rating date,respectively.

63

ESG and Global Investor Returns Study“Calculation Months” Indicate How Much Data is
Available
To ascertain whether companies with better MSCI ESG ratings outperform companies with worse MSCIESG ratings, we needed to construct portfolios that were comprised of companies within each of theratings categories. To accomplish this, company sets with specific characteristics were identified (monthly),market-cap-weighted monthly indexes were constructed over the January 2013−December 2021 time
horizon, and the relative performance of indexes comprised of companies with different characteristics(e.g., geographic area, country/market, industry, MSCI ESG rating) was measured.
The Number of Calculation Months Available Varies
The amount of data available to construct the indexes analyzed in the ESG Returns Study can varysignificantly across geographic regions, countries/markets, industries, and ratings. The more granular the
analysis, the fewer the number of observations.
For example, North America (defined herein as the U.S. and Canada combined) is one of the geographic
regions analyzed. The weight of the contributions of the two countries to the construction of the North
American index are not equal: the amount of data available to build the North America index contributedby U.S. companies is over eight times greater than the amount of data contributed by Canadian companies.
This is partly a function of the number of publicly traded companies in the U.S. versus Canadian stock
exchanges.
This variation in data availability extends to industries and ESG ratings as well. For example, an index
comprised of Japanese companies in GICS 30 – Consumer Staples with an MSCI ESG rating of AAA could
not be constructed because of lack of data. An index comprised of Japanese companies in GICS 10 – Energy
with an MSCI ESG rating of AAA could theoretically be constructed (as some data was available), but the
number of observations would not be statistically significant and therefore not presented in the study. The
number of Japanese companies and data in GICS 45 – Technology was sufficiently available to construct
an index comprised of AAA-rated companies.137 To provide a way of visualizing where data was plentiful
and where data was less so, the concept of calculation month is introduced:138
Calculation MonthAny combination of a single company’s characteristics (i.e., geographic area / country or market / industry/ ESG rating) in month “0” that also has: (i) a market cap in month “0”, and (ii) a total return in month “+1”
(i.e., the following month).

137

138

To learn more about the methodology used to construct indexes in this report, see the section entitled “Index Construction
Methodology.”
The calculation months reported in the ESG Returns Study are based on the set of companies in the MSCI ESG database thatmade it through the screens described in “Company Set Selection,” and are not intended to be descriptions of the makeup of
the entire MSCI ESG database.

64

ESG and Global Investor Returns StudyIn essence, we use the terminology of “number of calculation months” to represent the number ofobservations in each of the indexes we constructed. The number of calculation months reported in thisstudy is generally expressed as the sum of calculation months available across the 108-month time horizon
analyzed in the ESG Returns Study (January 2013−December 2021). This is appropriate for the high-levelcomparisons made in this section.
In the Study Results section of this report, when analyzing the results from specific indexes, additional
statistics about the individual indexes are shown (i.e., for any given index, we show the monthly average
number of companies over the January 2013−December 2021 time horizon and the number of companies
as of December 2021). These additional statistics are there to help the reader gauge the relative quality of
the indexes being compared, and any conclusions that can be drawn from these comparisons from astatistical standpoint.
For example, a comparison of a well-populated index comprised of AAA-rated companies (the best rating)to a well-populated index comprised of CCC-rated companies (the worst rating) might provide someinsight into whether companies with better MSCI ESG ratings perform better than companies with worse
MSCI ESG ratings. However, if one of the indexes (or both) has a small average number of companies (anda small number of monthly calculation months available to construct it), the confidence in any conclusion
about the relative performance of the indexes is necessarily diminished.
Calculation months are arguably a better way of gauging the amount of data that went into building an
index than merely counting and averaging the number of companies in it. For example, an index createdusing data from 10 companies that each had monthly information available for each of the 108 months
from January 2013 to December 2021 would have a total of 1,080 calculation months (108 months x 10
companies in each month). Alternatively, an index created using data from 10 companies, some of whichcame into existence (or disappeared) halfway through the January 2013−December 2021 time horizon,
had “spotty” monthly data over the entire time horizon, or were only assigned a rating in the latter part of
the time horizon would have fewer calculation months, and would likely not have the same quality as theindex that had more data to build it.
The Number of Calculation Months Available Has Increased Over TimeThe amount of MSCI ESG data available has significantly increased over time (see previous Exhibit A1-1).
Exhibit A1-3 provides statistics on how the number of calculation months available for each of thegeographic regions examined in this study changed over between January 2013 and December 2021.
The amount of data available to construct the World company set (“World”) portfolio indexes, as measured
by the number of calculation months, was 4,759 in January 2013 (the earliest month included in this study).
This more than doubled to 10,670 calculation months (an increase of 124%) by December 2021 (the latest
month in this study).

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ESG and Global Investor Returns Study

Exhibit A1-3: Number of Calculation Months – Monthly Statistics (January 2013−December 2021)

RegionsA

B(B ÷ A) - 1

January 2013−December 2021

Jan 2013

Dec 2021

Change (%)

Average

Median

Max

Min

World

4,759

10,670

124%

7,512

7,151

10,698

4,759

North America

2,305

3,033

32%

2,723

2,742

3,062

2,305

Asia

1,111

4,197

278%

2,233

1,794

4,202

1,111

688

1,929

180%

1,432

1,572

1,934

687

Jan 2013

Dec 2021

Change (%)

Average

MedianMax

Min

Australia

204

355

74%

278

274

358

200

Brazil

70

183

161%

108

85

184

70

Canada

118

352

198%

301

310

353

118

China

111

1,043

840%

420

192

1,043

111

France

88

178

102%

150

173

178

87

Germany

75

228

204%

168

189

229

75

Hong Kong SAR

101

304

201%

193

146

309

101

India

103

306

197%

201

176

307

103

Japan

424

1,331

214%

711

681

1,332

424

South Korea

110

520

373%

209

149

522

110

UK

221

487

120%

380

416

489

218

U.S.

2,187

2,681

23%

2,422

2,427

2,718

2,187

Western Europe
Countries

Source of underlying data: MSCI ESG database. All calculations by Kroll.

The World, the three geographic regions, and the 12 countries/markets analyzed all showed significant
increases in the number of calculation months from January 2013 to December 2021. The largest increase
was in China (+840%), and the smallest increase was in the U.S. (+23%).139 This is primarily due to: 1)
more companies outside the U.S. going public over this period (on a relative basis); and 2) MSCI’s increased
coverage, with more ESG ratings being assigned to non-U.S. companies on a relative basis.
Exhibit A1-3 also provides the average, median, maximum, and minimum number of calculation months
available for each of the geographic regions and countries/markets covered in this study. For example, themaximum number of calculation months available in any given month for the China company set over theJanuary 2013−December 2021 time horizon was 1,043, and the minimum was 111.

139

In January 2013, the U.S. accounted for 46.0% of all calculation months as a percentage of the calculation months associatedwith the World company set. By December 2021, the U.S. accounted for only 25.1% of all calculation months.

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ESG and Global Investor Returns Study

Geographic Regions Analyzed
The ESG Returns Study analyzes the relative performance of indexes comprised of companies withdifferent overall MSCI ESG ratings for: (i) the World, (ii) three geographic regions (North America, Asia andWestern Europe), and (iii) 12 countries/markets (Australia, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Japan, South Korea, the UK and the U.S.).
In Exhibit A1-4 the total number of calculation months available to construct the study’s World, North
America, Western Europe and Asia indexes is shown.140
Exhibit A1-4: Total Calculation Months for the World, North America, Western Europe and Asia
(January 2013−December 2021)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

World
The World includes the 13,256 companies that made it through the screening process. There were 118
countries associated with these companies. The full list of these countries/markets is presented inAppendix 2.
The number of calculation months available for each of the 118 countries varies significantly.141 Exhibit
A1-5 illustrates the 16 countries that contributed the most to construct the World index. For example, theU.S. contributed 261,572 calculation months to the construction of the World index, which represented
32.2% (261,572 ÷ 811,346) of total calculation months across all countries, while Germany had only
18,146 calculation months (2.2% of the total).

140

141

Similar analysis of the 12 individual countries/markets is also presented in the section “12 Individual Countries Included inAnalysis.”
For more information about calculation months, see the previous section entitled “The Concept of Calculation Months.”

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ESG and Global Investor Returns Study

Exhibit A1-5: Number of Calculation Months Available for the Top 16 Countries/Markets Included in
the World Index in the ESG Returns Study(January 2013−December 2021)
52.3%

261,572(32.2%)

45,356(5.6%)

76,742(9.5%)

32,533(4.0%)

40,986(5.1%)

30,046(3.7%)

21,728(2.7%)

13,747(1.7%)

16,190(2.0%)

20,848(2.6%)

22,613(2.8%)

18,146(2.2%)

14,801(1.8%)

12,554(1.5%)

12,644(1.6%)

11,703(1.4%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

A takeaway from Exhibit A1-5 is that the MSCI ESG data available to construct the indexes presented here
was concentrated in just a few countries. For example, 52.3% of all calculation months were associatedwith just four of the 118 countries included in the World index (the U.S., Japan, China, and the UK).

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ESG and Global Investor Returns Study

North America
The “North America” index includes the U.S. and Canada, which have a combined total of 294,105
calculation months (see Exhibit A1-6).
The U.S. contributed 261,572 calculation months to the construction of the index, which represents 88.9%of total calculation months across both countries.
Exhibit A1-6: Number of Calculation Months Available for Construction of the North American Index in
the ESG Returns Study(January 2013−December 2021)
261,572(88.9%)

32,533(11.1%)U.S.

CanadaSource of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Asia
The “Asia” index includes 19 countries/markets, which have a combined total of 241,137 calculation
months (see Exhibit A1-7). Japan contributed 76,742 calculation months to the construction of the overall
Asia index, which represented 31.8% of total calculation months across all countries.
Two of the 19 countries/markets accounted for 50.6% of the overall calculation months for the Asia index.
Exhibit A1-7: Number of Calculation Months Available for Construction of the Asia Index in the ESG
Returns Study(January 2013−December 2021)
50.6%
76,742(31.8%)

22,613(9.4%)
45,356(18.8%)

20,848(8.6%)

21,728(9.0%)

10,370(4.3%)

14,801(6.1%)

8,064(3.3%)

6,188(2.6%)

371(0.2%)

494(0.2%)

4,469(1.9%)

6,510(2.7%)

1,574(0.7%)

413(0.2%)

263(0.1%)

303(0.1%)

9(0.0%)

21(0.0%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Western Europe“Western Europe” includes 20 countries, which have a combined total of 154,610 calculation months
available for the construction of the Western Europe index (see Exhibit A1-8). The UK contributed 40,986
calculation months to the construction of the overall Western Europe index, which represented 26.5% of
total calculation months across all countries.
Four of the 20 Western Europe countries (the UK, Germany, France and Sweden) accounted for 57.6% of
the calculation months of the Western Europe region.
Exhibit A1-8: Number of Calculation Months Available for Construction of the Western Europe Index
in the ESG Returns Study(January 2013−December 2021)
57.6%
40,986(26.5%)
16,190(10.5%)
18,146(11.7%)

12,554(8.1%)

13,747(8.9%)

7,059(4.6%)

9,492(6.1%)

4,945(3.2%)

5,955(3.9%)

4,347(2.8%)

4,364(2.8%)

4,205(2.7%)

1,302(0.8%)

2,088(1.4%)

4,150(2.7%)

2,858(1.8%)

1,593(1.0%)

108(0.1%)

463(0.3%)

58(0.0%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

12 Individual Countries/Markets
12 countries/markets are analyzed individually in the ESG Returns Study, with a combined total of 598,463
calculation months available for the construction of their respective individual indexes (see Exhibit A1-9).
Exhibit A1-9: Number of Calculation Months Available for Index Construction of 12 IndividualCountries/Markets in the ESG Returns Study(January 2013−December 2021)
261,572(43.7%)

45,356(7.6%)

76,742(12.8%)

22,613
(3.8%)

32,533(5.4%)

40,986(6.8%)

30,046(5.0%)

16,190(2.7%)

20,848(3.5%)

21,728(3.6%)

18,146(3.0%)

11,703(2.0%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Industries Analyzed
There are 11 industry sectors in the GICS®.142 MSCI ESG industry assignments are based on GICS®
“subindustries,” where applicable.143 Subindustries are at the eight-digit GICS® level, which is thenarrowest (i.e., most specific) industry definition in the GICS® system. Kroll converted all MSCI ESG industry
assignments to GICS® “sectors,” which are at the two-digit level (i.e., least specific) industry definition in
the GICS® system:144,
1) GICS 10 – Energy: The Energy sector comprises companies engaged in exploration a production,refining & marketing, and storage & transportation of oil & gas and coal & consumable fuels. It also
includes companies that offer oil & gas equipment and services.
2) GICS 15 – Materials: The Materials sector includes companies that manufacture chemicals,
construction materials, glass, paper, forest products and related packaging products, and metals,
minerals and mining companies, including producers of steel.
3) GICS 20 – Industrials: The Industrials sector includes manufacturers and distributors of capital
goods such as aerospace & defense, building products, electrical equipment and machinery, andcompanies that offer construction & engineering services. It also includes providers of commercial& professional services including printing, environmental and facilities services, office services &supplies, security & alarm services, human resource & employment services, and research &consulting services. It also includes companies that provide transportation services.
4) GICS 25 – Consumer Discretionary: The Consumer Discretionary sector encompasses thosebusinesses that tend to be the most sensitive to economic cycles. Its manufacturing segment
includes automotive, household durable goods, leisure equipment and textiles & apparel. The
services segment includes hotels, restaurants and other leisure facilities, media production andservices, and consumer retailing and services.
5) GICS 30 – Consumer Staples: The Consumer Staples sector comprises companies whosebusinesses are less sensitive to economic cycles. It includes manufacturers and distributors of food,beverages and tobacco and producers of nondurable household goods and personal products. It
also includes food & drug retailing companies as well as hypermarkets and consumer supercenters.
6) GICS 35 – Health Care: The Health Care sector includes health care providers & services,companies that manufacture and distribute health care equipment & supplies, and health caretechnology companies. It also includes companies involved in the research, development,
production and marketing of pharmaceuticals and biotechnology products.

142

143
144

GICS® is the global industry classification standard jointly developed by MSCI and S&P. For more information, visit:https://www.msci.com/our-solutions/indexes/gics.
Industries in the MSCI ESG framework are defined by the 11 GICS® sectors.
Source of MSCI ESG industry assignments’ mapping to GICS ® subindustries: MSCI ESG Research LLC, “ESG Ratings
Methodology” and “Appendix 4: ESG Rating Industries,” (December 2021), page 61.

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ESG and Global Investor Returns Study

7) GICS 40 – Financials: The Financials sector contains companies involved in banking, thrifts &mortgage finance, specialized finance, consumer finance, asset management and custody banks,
investment banking and brokerage and insurance. It also includes Financial Exchanges & Data andMortgage Real Estate Investment Trusts (REITs).
8) GICS 45 – Information Technology: The Information Technology sector comprises companies thatoffer software and information technology services, manufacturers, and distributors of technology
hardware & equipment such as communications equipment, cellular phones, computers &peripherals, electronic equipment and related instruments, and semiconductors.
9) GICS 50 – Communication Services: The Communication Services sector includes companies thatfacilitate communication and offer related content and information through various mediums. It
includes telecom and media & entertainment companies including producers of interactive gaming
products and companies engaged in content and information creation or distribution throughproprietary platforms.
10) GICS 55 – Utilities: The Utilities sector comprises utility companies such as electric, gas and water
utilities. It also includes independent power producers & energy traders and companies thatengage in generation and distribution of electricity using renewable sources.
11) GICS 60 – Real Estate: The Real Estate sector contains companies engaged in real estatedevelopment and operation. It also includes companies offering real estate-related services andEquity REITs.

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ESG and Global Investor Returns Study

Industry Composition of the World Company Set
Eleven industries are analyzed in the ESG Returns Study. The World had a combined total of 811,346
calculation months available for the construction of the ESG Returns Study’s indexes. Exhibit A1-10 shows
the distribution of calculation months among these 11 industries.
GICS 20 – Industrials had the most calculation months available (131,607), and GICS 55 – Utilities had theleast number of calculation months available (33,672).
Exhibit A1-10: Number of Calculation Months Available for the World Indexes Constructed in the ESG
Returns Study by Industry Sector(January 2013−December 2021)
131,607(16.2%)

Industrials

122,668(15.1%)

Financials
95,887(11.8%)

Consumer Discretionary

87,972(10.8%)

Information Technology

81,106(10.0%)

Materials

72,292(8.9%)

Health Care
Real Estate

54,672(6.7%)

Consumer Staples

52,266(6.4%)

Energy40,194(5.0%)

Communication Services

39,010(4.8%)

Utilities

33,672(4.2%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Industry Composition of the North America Company Set
North America had a combined total of 294,105 calculation months available for the construction of the
ESG Returns Study’s indexes. Exhibit A1-11 shows the distribution of calculation months among the 11
industries in North America.
GICS 40 – Financials had the most calculation months available (43,458), and GICS 55 – Utilities had theleast number of calculation months available (9,897).
Exhibit A1-11: Number of Calculation Months Available for the North America Indexes Constructed in
the ESG Returns Study by Industry Sector(January 2013−December 2021)
43,458(14.8%)

Financials

Information Technology

42,630(14.5%)

Industrials

41,837(14.2%)
38,852(13.2%)

Health Care

34,722(11.8%)

Consumer Discretionary
23,401(8.0%)

Materials

19,764(6.7%)

Energy16,425(5.6%)

Real EstateConsumer Staples

12,497(4.2%)

Communication Services

10,622(3.6%)

Utilities

9,897(3.4%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Industry Composition of the Asia Company Set
Asia had a combined total of 241,137 calculation months available for the construction of the ESG Returns
Study’s Asia indexes. Exhibit A1-12 shows the distribution of calculation months among the 11 industries
in Asia.
GICS 20 – Industrials had the most calculation months available (44,947), and GICS 10 – Energy had theleast number of calculation months available (6,316).
Exhibit A1-12: Number of Calculation Months Available for the Asia Indexes Constructed in the ESG
Returns Study by Industry Sector(January 2013−December 2021)
44,947(18.6%)

Industrials

Consumer Discretionary

30,876(12.8%)

Financials

30,695(12.7%)
27,529(11.4%)

Information Technology

26,797(11.1%)

Materials

20,003(8.3%)

Consumer Staples

18,883(7.8%)

Real Estate
15,269(6.3%)

Health Care
11,304(4.7%)

Communication Services
Utilities

Energy8,518(3.5%)

6,316(2.6%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Industry Composition of the Western Europe Company Set
Western Europe had a combined total of 154,610 calculation months available for the construction of the
ESG Returns Study’s indexes (see Exhibit A1-13). Exhibit A1-13 shows the distribution of calculation
months among the 11 industries in Western Europe.
GICS 20 – Industrials had the most calculation months available (33,258), and GICS 55 – Utilities had theleast number of calculation months available (5,142).
Exhibit A1-13: Number of Calculation Months Available for the Western Europe Indexes Constructedin the ESG Returns Study by Industry Sector(January 2013−December 2021)
33,258(21.5%)

Industrials
21,097(13.6%)

Financials

19,114(12.4%)

Consumer Discretionary
Information Technology

13,524(8.7%)

Health Care

13,078(8.5%)

Materials

12,644(8.2%)
11,236(7.3%)

Real EstateConsumer Staples

9,685(6.3%)

Communication Services

9,615(6.2%)

EnergyUtilities

6,217(4.0%)

5,142(3.3%)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

Industries by Individual Country/Market
The 12 individual countries/markets discretely analyzed in the ESG Returns Study had a combined total of
598,463 calculation months available for the construction of each of the individual indexes (see Exhibit
A1-14).
A breakout of the industries by each of the 12 countries/markets analyzed individually is provided in Exhibit
A1-14. For each country/market, the industry with the largest number of calculation months is highlighted
in green, and the industry with the smallest number of calculation months is highlighted in red. For
example, GICS 15 – Materials was the industry with the largest number of calculation months available inAustralia (7,390), which represented 24.6% of calculation months across all industries in Australia.
Alternatively, GICS 55 – Utilities was the industry with the smallest number of calculation months available
in Australia (907, or 3.0%).
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ESG and Global Investor Returns Study

Exhibit A1-14: Number of Calculation Months Available for the Western Europe Indexes Constructedin the ESG Returns Study by Industry Sector (January 2013−December 2021)
Industry
EnergyMaterials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Communication Services
Utilities
Real Estate
Total

Australia%
Calc. Months
1,662
5.5%
7,390 24.6%
4,094 13.6%
3,890 12.9%
1,594
5.3%
2,022
6.7%
2,851
9.5%
1,549
5.2%
1,543
5.1%
907
3.0%
2,544
8.5%
30,046 100%

Industry
EnergyMaterials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Communication Services
Utilities
Real Estate
Total

FranceCalc. Months
598
825
3,744
2,197
1,074
1,615
1,897
1,222
1,250
592
1,176
16,190Industry
EnergyMaterials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Communication Services
Utilities
Real Estate
Total

Japan
%
Calc. Months
1,095
1.4%
7,335
9.6%
17,570 22.9%
12,611 16.4%
6,740
8.8%
4,473
5.8%
7,360
9.6%
9,568 12.5%
2,417
3.1%
1,553
2.0%
6,020
7.8%
76,742 100%

%
3.7%
5.1%
23.1%
13.6%
6.6%
10.0%
11.7%
7.5%
7.7%
3.7%
7.3%
100%

BrazilCalc. Months
488
1,265
1,210
1,444
1,045
630
1,286
265
482
2,596
992
11,703

4.2%
10.8%
10.3%
12.3%
8.9%
5.4%
11.0%
2.3%
4.1%
22.2%
8.5%
100%

CanadaCalc. Months
6,839
8,656
3,466
2,238
1,674
1,014
3,376
1,435
1,499
1,764
572
32,533Germany%Calc. Months
170
0.9%
1,609
8.9%
4,223 23.3%
2,718 15.0%
685
3.8%
1,496
8.2%
1,669
9.2%
2,341 12.9%
1,178
6.5%
638
3.5%
1,419
7.8%
18,146 100%Hong Kong SAR
Calc. Months
314
1,372
2,711
3,520
1,034
735
2,324
1,546
1,293
1,835
4,164
20,848South Korea
Calc. Months
461
2,277
5,010
2,853
2,076
2,365
2,921
2,735
1,435
350
130
22,613UK
Calc. Months
2,222
3,515
8,364
6,502
2,602
2,227
4,985
4,140
2,229
861
3,339
40,986

%

%
2.0%
10.1%
22.2%
12.6%
9.2%
10.5%
12.9%
12.1%
6.3%
1.5%
0.6%
100%

%
21.0%
26.6%
10.7%
6.9%
5.1%
3.1%
10.4%
4.4%
4.6%
5.4%
1.8%
100%

%
1.5%
6.6%
13.0%
16.9%
5.0%
3.5%
11.1%
7.4%
6.2%
8.8%
20.0%
100%

%
5.4%
8.6%
20.4%
15.9%
6.3%
5.4%
12.2%
10.1%
5.4%
2.1%
8.1%
100%

China
Calc. Months
921
6,394
8,760
5,072
3,265
4,068
5,007
4,921
1,685
1,566
3,697
45,356

%
2.0%
14.1%
19.3%
11.2%
7.2%
9.0%
11.0%
10.8%
3.7%
3.5%
8.2%
100%

India
%
Calc. Months
1,077
5.0%
3,798 17.5%
3,027 13.9%
2,117
9.7%
1,445
6.7%
1,906
8.8%
4,240 19.5%
1,532
7.1%
841
3.9%
1,304
6.0%
441
2.0%
21,728 100%U.S.
Calc. Months
12,925
14,74538,371
32,484
10,82337,83840,082
41,1959,123
8,133
15,853
261,572

%
4.9%
5.6%
14.7%
12.4%
4.1%
14.5%
15.3%
15.7%
3.5%
3.1%
6.1%
100%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

MSCI ESG Ratings
Methodological Framework
To conduct the ESG Returns Study, the outputs (i.e., ESG ratings) issued by MSCI are a key ingredient in
our analysis. However, it is not our goal to assess the reasonability of MSCI’s ESG rating methodology,
other than the procedures outlined previously in the report (see section titled “Foundation of the ESG
Returns Study – Selecting a Source for ESG Ratings”). A synopsis of the MSCI ESG methodologicalframework is provided below.145
History
MSCI ESG ratings aim to measure a company’s resilience to long-term, financially relevant ESG risks.146 As
of December 2021, MSCI had 17 years (2005−2021) of ESG data available.
Data Sources
MSCI collects data from the following sources:147•

Macro data at segment or geographic level from academic, government, and nongovernmentalorganization (NGO) datasets•

Company disclosure (10-Ks, annual reports, sustainability report, proxy reports, annual general
meeting results, etc.)•

Government databases, 3,400+ media outlets, NGO, other stakeholder sources

Monitoring
Companies typically receive an annual in-depth review, but significant changes detected during MSCI’s
daily monitoring of controversies and governance events may trigger an intra-year re-rating.
The MSCI ESG Ratings Methodology Committee approves (i) exceptions, (ii) rating overrides, and (iii)changes to a company’s rating(s) that are large (i.e., two or more ratings categories). The ESG Methodology
Committee also reviews model changes.
Hierarchy
The MSCI ESG methodological framework has three pillars (environment, social, and governance), 10
themes and 35 key issues, as outlined in Exhibit A1-15.148

145
146
147
148

For a more detailed review, visit https://www.msci.com/our-solutions.
Source: https://www.msci.com/zh/esg-ratings.
Companies are invited to participate in a formal data verification process.
Intra-industry weightings of the key issues at the company level may vary based upon “company-specific nuances that may not
be captured by the industry classification.” To learn more, visit: https://www.msci.com/our-solutions/esg-investing/esgindustry-materiality-map#information-section.

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ESG and Global Investor Returns Study

Exhibit A1-15: MSCI ESG Key Issue Hierarchy (Themes Listed Under Each ESG Pillar in Gray, Key Issues
Listed Under Each Theme)149
Environment Pillar
Climate Change– Carbon Emissions– Product Carbon Footprint– Financing Environmental Impact– Climate Change Vulnerability

Natural Capital– Water Stress– Biodiversity and Land Use– Raw Material Sourcing

Pollution and Waste
Environmental Opportunities– Toxic Emissions and Waste– Opportunities in Clean Tech
– Packaging Material and Waste – Opportunities in Green Building– Electronic Waste– Opportunities in Renewable Energy

Social Pillar
Human Capital– Labor Management– Health and Safety– Human Capital Development– Supply Chain Labor Standards

Product Liability
Stakeholder Opposition– Product Safety and Quality– Controversial Sourcing– Chemical Safety– Community Relations– Consumer Financial Protection– Privacy and Data Security– Responsible Investment– Health and Demographic Risk

Social Opportunities– Access to Communications– Access to Finance– Access to Health Care
– Opportunities in Nutrition and Health

Governance Pillar
Corporate Governance– Ownership and Control– Board– Pay– Accounting

Corporate Behavior– Business Ethics– Tax Transparency

MSCI ESG Ratings Scale (AAA to CCC)
The overall (or composite) MSCI ESG rating (i.e., MSCI ESG datapoint IVA_COMPANY_RATING) is used in
the ESG Returns Study to analyze the differences in performance (if any) of companies with different
overall MSCI ESG ratings. The overall MSCI ESG ratings are provided on a AAA-to-CCC scale.150
All companies in all industries are evaluated on the key issues under the governance pillar by MSCI. This isbased on MSCI’s view that governance is “…universally important and should be evaluated in an integrated
way, regardless of industry.”151 By contrast, the weights of the environmental and social key issues canvary between industries.”152,153

149
150

151
152
153

Source: MSCI ESG Research LLC, “ESG Ratings Methodology,” (December 2021), page 10.
A list of all overall MSCI ESG ratings as defined by MSCI ESG datapoint IVA_COMPANY_RATING is as follows (from best to
worst): AAA, AA, A, BBB, BB, B and CCC.
Source: MSCI ESG Research LLC, “ESG Ratings Methodology,” (December 2021), page 39.
Source: MSCI ESG Research LLC, “ESG Ratings Methodology,” (December 2021), page 39.
In addition to differences in key issues between industries, there can be differences in key issues within an industry at thecompany level due to “…company-specific nuances that may not be captured by the industry classification.” See:
https://www.msci.com/our-solutions/esg-investing/esg-industry-materiality-map#information-section.

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At a high level, a normalization within industries is accomplished by comparing all companies categorizedin an industry without regard to country assignment, but adjustments are made for “geographic segment
exposure” (segments are generally defined as countries of operations). These adjustments are made toincorporate differences in level of risk or opportunity based upon factors such as: (i) stringency andexpected change in regulations, (ii) country-level risk factors such as differential employee fatality rates or
corruption levels, and (iii) differences in incentive structures and subsidies.154
To arrive at a final MSCI ESG rating of a company, the weighted average of the governance pillar score andthe individual environmental and social key issue scores is computed and then normalized relative to its
industry peers. A benchmark peer set comprising all companies rated by MSCI ESG research within an ESG
industry is used to calculate industry-relative ratings, which MSCI uses to ensure that companies’ relative
ratings do not change when other companies are added to or removed from the peer set.155 After any
override considerations are factored in, each company’s final industry-adjusted score corresponds to arating between best (AAA) and worst (CCC).156
Leader, Average and Laggard Ratings Assignments
MSCI’s seven individual ESG rating categories (AAA to CCC) are mapped into the broader rating measures(Leader, Average and Laggard) (see Exhibit A1-16):157
The ESG Returns Study analyzes the relative performance of indexes comprised of both the individual
AAA-to-CCC ratings and the broader categories of Leader, Average and Laggard.
Exhibit A1-16: MSCI ESG Leader, Average and Laggard Assignments
AAA

AA

LeaderA company leading its
industry in managing themost significant ESG risks
and opportunities.

154

155

156
157

A

BBB

BB

Average
A company with a mixed or
unexceptional track record ofmanaging the most significant
ESG risks and opportunities
relative to industry peers.

B

CCC

Laggard
A company lagging its industry
based on its high exposure andfailure to manage significant
ESG risks.

Regarding some key issues, MSCI states the following: “… we assess some key issues geographic exposure at a subnational
level (e.g., mapping facilities to distinct water basins). Furthermore, when country-level segmentation is not available, weestimate country exposure by using the gross domestic product-weighted breakdown of regions.” Source: MSCI ESG Research
LLC, “ESG Ratings Methodology,” (December 2021), page 17.
ESG rating industries are based on GICS subindustries, where applicable which MSCI group to form peer sets in which
companies face relatively similar key issues.
Source: MSCI ESG Research LLC, “ESG Ratings Methodology,” (December 2021), pages 44−45.
Source of information: https://www.msci.com/our-solutions/esg-investing/esg-ratings.

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ESG and Global Investor Returns Study

MSCI ESG Ratings are Industry-Specific, but…
MSCI states that its overall ESG scores are “…not absolute but are explicitly intended to be interpreted
relative to a company’s industry peers.”158 However, there is strong precedent set by MSCI to mix-andmatch industries, and to make comparisons across industries.
As of March 2020, MSCI “…is the world’s largest provider of Environmental, Social and Governance (ESG)
Indexes with over 1,500 equity and fixed-income ESG Indexes….”159 These indexes include a Leaders index,
a Universal index, and Climate Change index (among others) that are comprised of companies with various
ESG characteristics, irrespective of industry classification.160 MSCI commonly makes comparisons acrossindustries, and countries, regions and classifications of economic development level (e.g., developed or
emerging markets), irrespective of industry classification.161,162
The ESG Returns Study makes similar comparisons between industries, countries/markets and geographic
regions.

158
159
160
161

162

Source of information: MSCI ESG Research LLC, “ESG Ratings Methodology,” (December 2021), page 45.
Source: https://www.msci.com/our-solutions/indexes/esg-indexes.
For more information, visit: https://www.msci.com/our-solutions/indexes/esg-indexes.
See Saurabh Katiyar (Executive Director, MSCI Research) and Yuliya Plyakha Ferenc (Vice President, MSCI Research), “ThePerformance of ESG Indexes: Year in Review, January 31, 2023. Available at:https://www.msci.com/www/blog-posts/the-performance-of-esg-indexes/03625107912.
Also, see: https://www.msci.com/documents/1296102/17835852/MSCI-ESG-Indexes-Factsheet.pdf/3b449b87-d470-977a3b56-77095b8d8fc7.

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ESG and Global Investor Returns Study

Ratings Composition of the Company Sets Usedin the ESG Returns Study163
Ratings Distribution at the World Level
Exhibit A1-17 shows the distribution of MSCI ESG individual AAA-to-CCC ratings (as measured by
calculation months), while Exhibit A1-18 illustrates the broader categories of Leader, Average and Laggard
ratings for the World. There are a total of 811,346 calculation months in both exhibits.164
Exhibit A1-17: Distribution of MSCI ESG Ratings (AAA-to-CCC) at the World Level, as Defined by
Calculation Months”(January 2013−December 2021)
188,638(23.3%)

190,513(23.5%)
150,107(18.5%)

137,115(16.9%)

80,221(9.9%)

43,335(5.3%)

21,417(2.6%)

AAA

AA

A

BBB

BB

B

CCC

Source of underlying data: MSCI ESG database. All calculations by Kroll.

The distribution in Exhibit A1-17 has a slightly negative skew, suggesting that the MSCI ESG ratings
associated with the companies that made it through the ESG Returns Study screening process skew more
toward negative ratings than positive ratings.165 The best rating (AAA) and the worst rating (CCC) havethe smallest number of calculation months, with 21,417 (2.6% of total) and 43,335 (5.3% of total),
respectively. Most of the ratings (63.6%) were in the middle (i.e., A, BBB, B (the Average category)), as
illustrated in Exhibit A1-18.

163

164
165

The calculation months reported in the ESG Returns Study are based on the set of companies that made it through the screens
described in the “Company Set Selection,” and are not intended to be descriptions of the makeup of the overall MSCI ESG
database.
To learn more about calculation months, see the section “The Concept of Calculation Months.”
The skew of the distribution in Exhibit A1-17 is -0.31.

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ESG and Global Investor Returns Study

Exhibit A1-18: Distribution of MSCI ESG Ratings (Leader, Average, Laggard) at the World Level, as
Defined by Calculation Months(January 2013−December 2021)

516,266(63.6%)

193,442(23.8%)
101,638(12.5%)

LeaderAverage

LaggardSource of underlying data: MSCI ESG database. All calculations by Kroll.

Ratings (Leader, Average, Laggard) Distribution at the Geographic Regions Level
In Exhibits A1-19, A1-20 and A1-21, the distribution of calculation months by ESG rating is shown
respectively for North America, Asia and Western Europe. Each of the three geographic regions’distribution is similar to the World distribution in that the best rating category (Leader) and the worst rating
category (Laggard) have the smallest number of calculation months, with most being concentrated in the
middle (i.e., the Average category).
However, a significant difference is found in the pattern of the ratings distribution for Leader and Laggardin Western Europe when compared to the North America and Asia company sets:•

The percentage of the best ratings category (Leader) for Western Europe (28.6%) is four times
greater than the percentage of the Leader ratings in North America (6.6%) and more than triple
those in Asia (8.1%).

•

The percentage of the worst ratings category (Laggard) for Western Europe (8.8%) isapproximately one-third the percentage of the Laggard ratings in North America (23.5%) and aquarter of Asia’s (34.5%).

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ESG and Global Investor Returns Study

Exhibit A1-19: Distribution of MSCI ESG Ratings (Leader, Average, Laggard) in North America, as
Defined by Calculation Months(January 2013−December 2021)

68,994
23.5%

19,505
6.6%

LeaderAverage
Laggard205,606
69.9%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

Exhibit A1-20: Distribution of MSCI ESG Ratings (Leader, Average, Laggard) in Asia, as Defined by
Calculation Months(January 2013−December 2021)

19,543
8.1%
LeaderAverage

Laggard

83,082
34.5%
138,512
57.4%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

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ESG and Global Investor Returns Study

Exhibit A1-21: Distribution of MSCI ESG Ratings (Leader, Average, Laggard) in Western Europe, as
Defined by Calculation Months(January 2013−December 2021)

13,6348.8%

44,145
28.6%

LeaderAverage

Laggard

96,831
62.6%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

Ratings by Geographic Area and Industry
The previous exhibits examined industry assignments and MSCI ESG ratings separately. The following
exhibits examine MSCI ESG ratings by industry. These comparisons are made for the World and at theregional level (North America, Asia and Western Europe).
World − Ratings by Industry
Exhibit A1-22 first shows the number of calculation months for the World company set by industry (labeled
as Total Observations).166 To its right, it then shows the percentage of each rating assignment by industry,
as measured by calculation months.
For example, at the individual industry level, GICS 10 – Energy has a total of 40,194 observations (orcalculation months) in the January 2013−December 2021 period. Of this total of observations, 2.7% was
associated with an AAA rating. The 2.7% is shown in black shading in Exhibit A1-22. Alternatively, therating that was most often assigned for GICS 10 – Energy was BB, with 26.1% of total observations (orcalculation months) for the industry (also shown in black shading in Exhibit A1-22).

166

The total number of calculation months in Exhibit A1-22 is 811,346. To learn more about calculation months, see the section“The Concept of Calculation Months.”

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ESG and Global Investor Returns Study

Exhibit A1-22: World – MSCI ESG Rating by Industry, as Defined by Calculation Months(January 2013−December 2021)
Total
Industry

LeaderAverage

Laggard

Observations

AAA

AA

A

BBB

BB

B

Energy40,194

2.7%

6.9%

13.5%

24.4%

26.1%

22.3%

4.1%

9.6%

64.0%

Materials

81,106

2.7%

6.8%

13.8%

20.4%

21.6%

22.1%

12.6%

9.5%

55.9%

34.7%

Industrials

131,607

3.2%

13.9%

20.0%

21.4%

20.7%

15.2%

5.6%

17.1%

62.2%

20.7%

CCC

(AAA + AA) (A + BBB + BB) (B + CCC)
26.4%

Consumer Discretionary

95,887

2.3%

11.8%

17.2%

24.0%

23.1%

16.3%

5.3%

14.1%

64.3%

21.6%

Consumer Staples

52,266

2.6%

12.1%

19.6%

20.9%

21.0%

18.7%

5.2%

14.7%

61.5%

23.9%

Health Care

72,292

1.4%

8.7%

17.6%

28.1%

26.4%

14.9%

3.0%

10.1%

72.0%

17.8%

Financials

122,668

2.7%

8.2%

14.7%

24.2%

27.8%

19.2%

3.2%

10.9%

66.8%

22.3%

Information Technology

87,972

1.6%

8.3%

16.5%

26.2%

25.2%

18.5%

3.8%

9.8%

67.9%

22.3%

Communication Services

39,010

4.3%

10.1%

21.0%

21.6%

19.5%

18.1%

5.4%

14.4%

62.2%

23.4%

Utilities

33,672

4.7%

12.6%

21.3%

21.7%

18.5%

14.8%

6.4%

17.3%

61.5%

21.2%

Real Estate

54,672

2.5%

7.8%

12.3%

20.7%

23.6%

28.1%

5.0%

10.3%

56.6%

33.1%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

In general, BBB was the rating most often assigned across the 11 individual industries, (i.e., BBB came infirst in six of the 11 industries). Alternatively, AAA was the rating least often assigned in all 11 industries(i.e., AAA came in last in all 11 industries).167
In the broader rating categories, Leader was the least often assigned in all 11 industries, and Average was
the most often assigned.
North America – Ratings by Industry
Exhibit A1-23 first shows the number of calculation months for the North America company set by industry(labeled as Total Observations).168 To its right, it then shows the percentage of each rating assignment byindustry, as measured by calculation months.
For example, at the individual industry level, GICS 10 – Energy has a total of 19,764 observations (orcalculation months) in the January 2013−December 2021 period. Of this total of observations, 0.8% was
associated with an AAA rating. The 0.8% is shown in black shading in Exhibit A1-23. Alternatively, therating that was most often assigned for GICS 10 – Energy was BB, with 32.5% of total observations (orcalculation months) for the industry (also shown in black shading in Exhibit A1-23).
In general, BB was the rating most often assigned across the 11 individual industries (i.e., BB came in firstin nine of the 11 industries). Alternatively, AAA was the least often assigned rating to all 11 industries (i.e.,
AAA came in last in all 11 industries).169

166

168

169

The comparisons in Exhibit A1-22 are at the individual industry level, as opposed to a count of the rating assignments acrossall industries in aggregate. The count of rating assignments at the World level across all industries (i.e., without regard toindustry) is shown in Exhibit A1-17. In Exhibit A1-22, AAA is still the least-assigned rating (2.6%), and BB is still the mostassigned rating (23.5%), followed closely by BBB (23.3%).
The total number of calculation months in Exhibit A1-23 is 294,105. To learn more about calculation months, see the section“The Concept of Calculation Months.”
The comparisons in Exhibit A1-23 are at the individual industry level, as opposed to a count of the rating assignments acrossall industries in aggregate.

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ESG and Global Investor Returns Study

Exhibit A1-23: North America − MSCI ESG Rating by Industry, as Defined by Calculation Months(January 2013−December 2021)
Total
Industry

LeaderAverage

Laggard

Observations

AAA

AA

A

BBB

BB

B

CCC

Energy19,764

0.8%

1.8%

10.3%

24.6%

32.5%

27.4%

2.6%

2.6%

67.4%

30.0%

Materials

23,401

1.5%

3.7%

13.7%

20.8%

27.5%

25.3%

7.5%

5.2%

62.0%

32.8%

Industrials

41,837

1.1%

8.2%

23.0%

25.8%

26.7%

12.9%

2.4%

9.3%

75.4%

15.3%

Consumer Discretionary

34,722

0.8%

7.4%

14.6%

27.4%

30.7%

15.0%

4.2%

8.2%

72.7%

19.1%

Consumer Staples

12,497

1.4%

9.2%

15.2%

22.3%

26.2%

21.4%

4.3%

10.6%

63.7%

25.6%

Health Care

38,852

0.9%

6.3%

15.5%

30.0%

30.5%

15.1%

1.6%

7.2%

76.0%

16.7%

Financials

43,458

0.5%

3.7%

7.9%

22.7%

35.9%

26.2%

3.1%

4.2%

66.6%

29.3%

Information Technology

42,630

1.0%

6.0%

17.2%

26.2%

29.7%

18.1%

1.9%

7.0%

73.0%

20.0%

Communication Services

10,622

0.3%

6.4%

13.4%

24.0%

29.6%

22.8%

3.5%

6.7%

67.0%

26.3%

Utilities

9,897

1.7%

8.1%

20.1%

26.7%

22.7%

18.2%

2.4%

9.8%

69.5%

20.7%

Real Estate

16,425

0.2%

2.5%

8.6%

19.4%

29.3%

37.3%

2.6%

2.8%

57.3%

39.9%

(AAA + AA) (A + BBB + BB)(B + CCC)

Source of underlying data: MSCI ESG database. All calculations by Kroll.

In the broader rating categories, Leader was the least often assigned in all 11 industries, and Average was
the most often assigned, matching the pattern in the World company set (see Exhibit A1-22).
Asia − Ratings by Industry
Exhibit A1-24 first shows the number of calculation months for the Asia company set by industry (labeled
as Total Observations).170 To its right, it then shows the percentage of each rating assignment by industry,
as measured by calculation months.
Exhibit A1-24: Asia − MSCI ESG Rating by Industry, as Defined by Calculation Months(January 2013−December 2021)
Total
Industry

LeaderAverage

Laggard

Observations

AAA

AA

A

BBB

BB

B

CCC

(AAA + AA) (A + BBB + BB) (B + CCC)

Energy

6,316

1.6%

8.1%

13.6%

27.9%

17.3%

20.1%

11.4%

9.7%

58.7%

31.5%

Materials

26,797

1.4%

6.2%

10.8%

18.5%

17.2%

23.6%

22.3%

7.6%

46.5%

45.9%

Industrials

44,947

1.6%

8.7%

13.7%

18.7%

22.1%

23.5%

11.8%

10.3%

54.5%

35.2%

Consumer Discretionary

30,876

1.1%

7.6%

15.5%

21.1%

23.4%

23.2%

8.1%

8.7%

60.0%

31.3%

Consumer Staples

20,003

0.3%

7.0%

12.8%

19.5%

25.4%

26.2%

8.9%

7.3%

57.6%

35.1%

Health Care

15,269

0.6%

5.7%

14.7%

22.2%

25.5%

22.4%

8.9%

6.3%

62.4%

31.3%

Financials

30,695

0.5%

6.2%

15.0%

26.1%

26.2%

19.7%

6.2%

6.7%

67.3%

26.0%

Information Technology

27,529

1.6%

8.1%

14.9%

22.9%

20.6%

23.5%

8.5%

9.6%

58.4%

32.0%

Communication Services

11,304

2.6%

5.5%

22.1%

19.4%

21.6%

23.0%

5.7%

8.1%

63.1%

28.8%

Utilities

8,518

0.8%

3.3%

9.3%

16.2%

27.8%

22.8%

19.8%

4.2%

53.3%

42.5%

Real Estate

18,883

1.7%

4.5%

8.9%

16.3%

27.0%

34.1%

7.5%

6.2%

52.2%

41.6%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

170

The total number of calculation months in Exhibit A1-24 is 241,137. To learn more about calculation months, see the section“The Concept of Calculation Months.”

89

ESG and Global Investor Returns Study

For example, at the individual industry level, GICS 10 – Energy has a total of 6,316 observations (orcalculation months) in the January 2013−December 2021 period. Of this total of observations, 1.6% was
associated with an AAA rating. The 1.6% is shown in black shading in Exhibit A1-24. Alternatively, therating that was most often assigned for GICS 10 – Energy was BBB, with 27.9% of total observations (orcalculation months) for the industry (also shown in black shading in Exhibit A1-24).
In general, B was the rating most often assigned across the 11 individual industries (i.e., BB came in firstin six of the 11 industries). Alternatively, AAA was the rating least often assigned to all 11 industries (i.e.,
AAA came in last in all 11 industries).171
In the broader categories, Leader was the least often assigned in all 11 industries, and Average was themost often assigned in all 11 industries, matching the pattern in the World and North America company
sets (see Exhibits A1-22 and A1-23).
Western Europe − Ratings by Industry
Exhibit A1-25 first shows the number of calculation months for the Western Europe company set byindustry (labeled as Total Observations).172 To its right, it then shows the percentage of each rating
assignment by industry, as measured by calculation months.
Exhibit A1-25: Western Europe − MSCI ESG Rating by Industry, as Defined by Calculation Months(January 2013−December 2021)
Total
Industry

LeaderObservations

AAA

AA

A

BBB

BB

B

CCC

Average

Laggard(AAA + AA) (A + BBB + BB) (B + CCC)

Energy

6,217

8.0%

20.2%

18.4%

25.4%

15.6%

10.8%

1.6%

28.2%

59.4%

12.4%

Materials

12,644

10.6%

14.5%

20.0%

22.7%

18.5%

12.1%

1.5%

25.2%

61.2%

13.7%

Industrials

33,258

7.5%

28.1%

24.8%

19.8%

12.5%

6.5%

0.9%

35.6%

57.1%

7.3%

Consumer Discretionary

19,114

6.5%

25.2%

23.9%

21.9%

14.1%

6.2%

2.2%

31.7%

60.0%

8.3%

Consumer Staples

9,685

10.6%

25.4%

27.2%

21.5%

9.2%

5.4%

0.8%

36.0%

57.9%

6.1%

Health Care

13,078

3.9%

13.9%

26.2%

29.6%

18.8%

7.4%

0.2%

17.7%

74.6%

7.6%

Financials

21,097

7.9%

13.9%

20.0%

25.9%

20.9%

10.9%

0.5%

21.8%

66.8%

11.4%

Information Technology

13,524

3.9%

16.2%

17.8%

33.9%

19.6%

8.1%

0.4%

20.1%

71.4%

8.5%

Communication Services

9,615

11.0%

21.4%

27.6%

17.7%

11.7%

7.4%

3.2%

32.4%

57.0%

10.6%

Utilities

5,142

15.2%

28.9%

36.7%

13.0%

4.8%

1.2%

0.3%

44.1%

54.4%

1.4%

Real Estate

11,236

4.0%

21.0%

26.0%

29.9%

11.5%

7.0%

0.6%

25.0%

67.4%

7.6%

Source of underlying data: MSCI ESG database. All calculations by Kroll.

For example, at the individual industry level, GICS 10 – Energy has a total of 6,217 observations (orcalculation months) in the January 2013−December 2021 period. Of this total of observations, 8.0% was
associated with an AAA rating (see black shading in Exhibit A1-25), while 1.6% as associated with CCC,
the least often assigned rating for GICS 10 – Energy at the Western Europe level. Alternatively, the ratingthat was most often assigned for GICS 10 – Energy was BBB, with 25.4% of total observations (orcalculation months) for the industry (also shown in black shading in Exhibit A1-25).

171

172

The comparisons in Exhibit A1-25 are at the individual industry level, as opposed to a count of the rating assignments acrossall industries in aggregate.
The total number of calculation months in Exhibit A1-25 is 154,610. To learn more about calculation months, see the section“The Concept of Calculation Months.”

90

ESG and Global Investor Returns Study

In general, BBB was the rating most often assigned across the 11 individual industries, (i.e., BBB came infirst in six of the 11 industries). Alternatively, CCC was the rating least often assigned to all 11 industries(i.e., CCC came in last in all 11 industries).173
In the broader categories, Laggard was the least often assigned in all 11 industries, and Average was themost often assigned. This differs from the pattern seen for the World, North America and Asia company
sets, where AAA was the least assigned rating in all 11 industries (see Exhibits A1-22, A1-23 and A124).
Takeaways From All Geographic Regions
For the companies in the ESG Returns Study that made it through the screening process, there are twomain observations:173•

MSCI ESG ratings for the best rating (AAA) are the rarest (i.e., least assigned) in the North Americaand Asia company sets, but in the Western Europe company set, the rarest rating (i.e., leastassigned) is CCC (i.e., the worst rating).

•

The MSCI ESG ratings most assigned in the North America and Asia company sets are in the
middle of the range, but tend to be more negative than positive. While the MSCI ESG ratings mostassigned in the Western Europe company set are also in the middle of the range, they tend to be
more positive than negative.

The comparisons in Exhibit A1-25 are at the individual industry level (i.e., within each of the industries, in turn) as opposed to a
count of the ratings assignments across all industries in aggregate.

91

ESG and Global Investor Returns Study

Index Construction Methodology
Market Capitalization Weighed
The purpose of the ESG Returns Study is to analyze the differences in performance (if any) of indexes
comprised of companies with different overall MSCI ESG ratings.
The indexes used in this study are not indexes created by MSCI.174 The indexes used in the ESG Returns
Study were created by Kroll using market-cap-weighted index construction techniques like those used tocreate the S&P 500 Index and other well-known indexes, including the MSCI USA Index.175,176,177
Exhibit A1-26 is a graph of performance of three indexes over the January 2013−December 2021 time
horizon (monthly) that is used in this study: (i) the S&P 500 Index, (ii) the MSCI USA Index, and (iii) an index
created by Kroll that includes all of the U.S. companies from the MSCI ESG database that made it throughthe ESG Returns Study’s screening process. All three of the indexes in Exhibit A1-26 are market-capweighted total return indexes denominated in U.S. dollars.178

174
175
176

177

178

To learn more about MSCI ESG indexes, visit: msci.com/our-solutions/indexes/esg-indexes.
To learn more about the S&P 500 Index, visit: https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview.
To learn more about the MSCI USA Index, visit: https://www.msci.com/documents/10199/67a768a1-71d0-4bd0-8d7ef7b53e8d0d9f.
The indexes presented in the Kroll ESG Returns Study are market-cap-weighted because equal-weighted indexes can produce
a substantial upward bias.
Total Return consists of three components: (i) price (i.e., capital appreciation) returns, (ii) income returns (e.g., dividends), and(iii) reinvestment (e.g., of dividends) returns.

92

ESG and Global Investor Returns Study

Exhibit A1-26: Total Return Indexes of the S&P 500 Index, MSCI USA Index, and Kroll-Created ESG
Study U.S. Index (USD)(January 2013−December 2021) (USD 1 = December 2012)
$4.5
$4.0
$3.5
$3.0

S&P 500 Index
MSCI USA Index
Kroll-Created ESG Study United States Index

$2.5
$2.0
$1.5
$1.0
$0.5
$0.0

Sources of underlying data: MSCI ESG database and S&P Capital IQ. All calculations by Kroll.

The three indexes in Exhibit A1-26 had very similar performance characteristics over the January
2013−December 2021 time horizon shown, and nearly overlap. The annual geometric (i.e., compound) rateof return of the S&P 500 Index, the MSCI USA Index and the Kroll-created ESG Study U.S. Index was
16.61%, 16.70% and 16.65%, respectively, over the nine-year time horizon shown in Exhibit A1-26.
In this same fashion, Kroll used the 13,256 companies from the MSCI ESG database that made it throughour screening process to construct indexes of various area, country/market, industry, and MSCI ESG rating
combinations for the ESG Returns Study.
“Last Known State” Assumption of MSCI Country, Industry, and ESG Ratings Assignments
MSCI typically does an annual in-depth review of companies (sometimes more frequently, sometimes lessfrequently). For all country assignments (i.e., MSCI ESG datapoint ISSUER_CNTRY_DOMICILE), industry
assignments (i.e., MSCI ESG datapoint IVA_INDUSTRY), and ratings assignments (i.e., MSCI ESG datapoint
IVA_COMPANY_RATING), the last known state was assumed.
For example, if the IVA_COMPANY_RATING as of IVA_RATING_DATE January 2015 for Company XYZ
was AA, and the next IVA_RATING_DATE in the database for Company XYZ was January 2016, it was
assumed that Company XYZ’s rating was also AA for the months in between ratings dates (i.e., February
2015 through December 2015 were also AA). The same procedure was followed for country and industry
assignments.

93

ESG and Global Investor Returns StudyThe ESG Returns Study’s time horizon is January 2013−December 2021. Where appropriate, assignmentof last known state of an MSCI ESG country/market, industry, or rating assignment as of January 2013
(and forward) made use of MSCI ESG country, industry, or rating assignments associated with
IVA_RATING_DATEs prior to January 2013.179
For example, if Company XYZ did not have an IVA_COMPANY_RATING associated with
IVA_RATING_DAT” January 2013, but (most recently) did have an IVA_COMPANY_RATING associatedwith IVA_RATING_DATE October 2012 (e.g., AA), then the last known state of Company XYZ’s MSCI ESG
rating (AA as of October 2012) would be assigned to January 2013.
Company Characteristics and Market Capitalization are Lagged One Month Behind Total Return
Company Characteristics
Company characteristics are defined in this study as (i) the area associated with a company (World, North
America, Asia, Western Europe or an individual country); (ii) the industry the company operates in as
defined by two-digit GICS® code; and (iii) the company’s MSCI ESG rating (either on the AAA-to-CCC or
the broader Leader, Average, Laggard scales).
Market Capitalization
Market capitalization (market cap) is defined as a company’s common shares outstanding times the priceper share, as measured at month-end and reported by Refinitiv.180
Total Return
Total return is defined as changes in a company’s share price from month-end to month-end, including theeffects of dividends, as reported by Refinitiv.
Lagging Avoids “Double Counting”
The month-end (i.e., month “0”) to month-end (i.e., month “+1”) change in share price information is used
as an input in the calculation of the monthly total return and is thus already embedded in the month-end
total return. To avoid double counting returns in the creation of the indexes in the ESG Returns Study,
company market caps (which are used as weights to calculate the overall return for a given portfolio/index)
are lagged one month behind company total returns.
In the same fashion, to avoid potentially double counting information associated with company
characteristics that may already be embedded in total return, company characteristics are also lagged one
month behind total returns.
Lagging is illustrated in Exhibit A1-27, where company characteristic and market cap information fromMonth 0 (in this example, May 2017) is paired with the company’s total return from Month +1 (thesubsequent month, June 2017).

179

180

The earliest month that could be used for country, industry, and ratings assignment prior to January 2013 is February 2011 (24months prior). See the section entitled “Screen 4: ‘Staleness’ of Rating” for more information.
Refinitiv, an LSEG business, is one of the world’s largest providers of financial markets data and infrastructure. To learn more
about Refinitiv, visit: https://www.refinitiv.com/en.

94

ESG and Global Investor Returns Study

Exhibit A1-27: Company Characteristics and Market Cap Information is Lagged One Month Behind
Total Return
Month 0(e.g., May 2017)

Month +1
(e.g., June 2017)MSCI ESG Rating:

Area:
Region or Country

AAA to CCC
orLeader, Average, Laggard

Monthly
Total Return

IndustryMonthly
Market Capitalization

Lagged One Month Behind Total Return

Calculation Months are Index “Building Blocks”
The purpose of the ESG Returns Study is to analyze whether companies with better MSCI ESG ratings
outperform companies with worse MSCI ESG ratings. To accomplish this, company sets with specificcharacteristics are identified (monthly), market-cap-weighted monthly indexes are constructed over theJanuary 2013−December 2021 time horizon of the study, and the relative performance of indexes
comprised of companies with different characteristics (e.g., area, country/market, industry, MSCI ESG
rating) is measured.
The amount of data available to construct the indexes analyzed in the ESG Returns Study can varysignificantly across geographic regions, countries/markets, industries, and ratings. To provide a way ofquantifying where data was plentiful and where data was less plentiful, the concept of calculation monthis introduced:
Calculation Month: Any combination of a single company’s characteristics (i.e., area, country/industry, ESG
rating) in month 0 that also has: (i) a market cap in month 0, and (ii) a total return in month +1 (i.e., thefollowing month).

95

ESG and Global Investor Returns Study

Exhibit A1-27 demonstrates how a company’s characteristics and market caps are lagged one monthbehind the company’s total returns to avoid double counting of return. Exhibit A1-27 also represents asingle calculation month. Calculation months can be thought of as the building blocks used to construct
the indexes in this study.181,182
An example of a single calculation month might be for hypothetical Company XYZ, which has the following
characteristics in the MSCI ESG database as of IVA_RATING_DATE May 2017:183•••

Country: Germany
Industry: GICS 20 − Industrials
MSCI ESG Rating: BBB

If Company XYZ also has a market cap as of May 2017 (month 0, in this case) and a total return in June2017 (the following month; month +1, in this case), then this combination constitutes a calculation month,and will be used as a single building block in the creation of an index of BBB-rated companies in Germany
that operate in the industry GICS 20 – Industrials.
Calculation months are arguably a better way of gauging the amount of data that went into building an
index than merely counting the number of companies in it. For example, an index created using data from10 companies that each had monthly information available for each of the 108 months from the January
2013−December 2021 time horizon analyzed in this study) would have a total of 1,080 calculation months(108 months x 10 companies in each month). Alternatively, an index created using data from 10
companies—some of which came into existence (or disappeared) halfway through the January
2013−December 2021 time horizon, had “spotty” monthly data over the entire time horizon, or were only
assigned a rating in the final year of the time horizon—would have fewer calculation months, and would
likely not have the same quality as the index that had more data to build it.
Calculation months also enable a high-level comparison of the relative size (through the lens of data
availability) of the geographic regions or countries covered, or even to gain an understanding of whether
an index is dominated by a single (or just a few) countries.

181

182

183

The calculation months reported in the ESG Returns Study are based on the set of companies that made it through the screens
described in the section “Company Set Selection,” and are not intended to be descriptions of the makeup of the entire MSCI ESG
database.
Indexes created in this report do not have to have all the characteristics shown in Exhibit A1-27 (i.e., World, Region orCountry/Market, Industry, MSCI ESG rating). Company characteristics in any combination can be used to create an index. For
example, an index can be created for companies in the U.S. company set, without regard to what industry in which they operateor what their MSCI ESG rating is. An index could also be created. For example, with companies in the Asia company set thathave an MSCI ESG rating of BB, without regard to what industry they operate in.
IVA_RATING_DATE is an MSCI ESG database datapoint that represents the date of the most recently completed ESG ratings
review and assessment for that issuer. For a list of all MSCI ESG database datapoints used in this study, see the section “Sourcesof Data.”96

ESG and Global Investor Returns Study

For example, the North America company set in this study contributes 294,105 calculation months to index
creation, while the Asia and Western Europe company sets contribute with fewer observations (241,137
and 154,610 calculation months, respectively; see Exhibit A1-4). Another example might be the North
America company set (defined here as the U.S. and Canada), which is dominated by the U.S. (the U.S.
contributes 261,572 calculation months to index creation, while Canada contributes only 32,533
calculation months).
Calculation Months are Summed Across the January 2013−December 2021 Time Horizon
The number of calculation months reported in the various tables and graphs in the ESG Returns Study are
the sum of calculation months available across all months in the time horizon analyzed in the study (January
2013−December 2021). For example, the total number of calculation months available to construct anindex over the January 2013−December 2021 period comprised of BBB-rated companies in Germany that
operate in the industry GICS 20 – Industrials was 920. Alternatively, the total number of calculation months
available to construct an index comprised of AAA-rated companies in Germany that operate in the industry
GICS 10 − Energy was zero.
The Minimal Number of Calculation Months Required
The indexes presented in the ESG Returns Study had to have at least one calculation month available ineach of the 108 months from January 2013 to December 2021.
The Minimal Number of Companies Required
In addition to the minimal number of calculation months threshold, the indexes presented in the ESG
Returns Study had to have at least an average of 50 companies during the January 2013−December 2021
period in order to be shown. We applied a further restriction when deciding whether to show the detail forany of the 11 industries within specific geographic regions or country/markets. Specifically, we excluded
industries where the average number of companies over the January 2013− December 2021 time horizon
was zero in two or more ESG rating categories (e.g., it was often the case that industries within a given
country/market had no companies rated AAA and CCC). By applying these screening criteria, the U.S. was
the only country that had enough data availability to display results for all 11 industries. The World and all
three geographic regions (North America, Western Europe and Asia) had sufficient data to have results
displayed for all 11 industries.184
Putting It All Together
The ingredients to construct a single-month index return using two calculation months are shown in Exhibit
A1-28. Companies ABC and XYZ in Exhibit A1-28 are both (i) UK companies, with (ii) MSCI ESG ratingBB, that (iii) operate in industry GICS 40 – Financials, (iv) have monthly market cap data as of
IVA_RATING_DATE 185 May 2017, and (v) have monthly total return data as of the subsequent month (June2017).

184

185

Visit the full interactive report to see which industries were available within each specific country/market:
www.kroll.com/esg-global-investor-returns-study.
IVA_RATING_DATE is an MSCI ESG database datapoint that represents the date of the most recently completed ESG ratings
review and assessment for that issuer. For a list of all MSCI ESG database datapoints used in this study, see the section “Sourcesof Data.”97

ESG and Global Investor Returns Study

Exhibit A1-28: Construction of a Single-Month (June 2017) Index Return Using Two Calculation
Months186
Month 0(e.g., May 2017)

Month +1
(e.g., June 2017)

Company

Industry

MSCI ESG Rating

Market Cap ($MM)

Total Return

UK Company ABC

GICS 40 - Financials

BB

$80

5.3%

UK Company XYZ

GICS 40 - Financials

BB

$16

1.2%

Lagged One Month Behind Total Return

Using the information in Exhibit A1-28 to calculate a market-cap-weighted index return for June 2017 fora portfolio comprised of Companies ABC and XYZ is accomplished as follows:((USD 80 x 5.3%) + (USD 16 x 1.2%)) / (USD 80 + USD 16) = 4.6%
The market-cap-weighted index return (4.6%) looks more like Company ABC’s return (5.3%) thanCompany XYZ’s return (1.2%) because Company ABC’s market cap is significantly larger (USD 80 million)
than Company ABC’s market cap (USD 16 million), so Company ABC carries more weight in the weighted
average calculation.

186

The Kroll ESG Returns Study uses market capitalization and total return data expressed in U.S. dollars, regardless of companies’country affiliation to: (i) simplify the analysis and (ii) aid in comparing results across regions and countries.

98Appendix 2: Countries/Markets
Included in the Study
Companies located in the following 118 countries and markets were included in at least some of themonths analyzed during the 2013−2021 period:
Country/Market
Argentina

FranceMalawi

SerbiaAustralia

Gabon

Malaysia

Singapore

Austria

Georgia

Mali

Slovakia

BahamasGermany

Malta

Slovenia

Bahrain

Ghana

MauritiusSouth Africa

Bangladesh

Gibraltar

MexicoSouth Korea

Belgium

GreeceMonaco

Spain

Benin

Guernsey

Mongolia

Sri Lanka

BermudaHong Kong SAR

MoroccoSwedenBolivia

Hungary

Namibia

Switzerland

Bosnia & Herzegovina

IcelandNetherlands

TaiwanBotswana

India

New ZealandTanzania

BrazilIndonesia

Niger

ThailandBulgaria

IrelandNigeria

Togo

Burkina Faso

Isle Of Man

NorwayTrinidad & Tobago

CanadaIsraelOman

Tunisia

Cayman Islands

Italy

Pakistan

TurkeyChile

Jamaica

Palestine

Uganda

China

Japan

PanamaUkraineColombia

JerseyPapua New Guinea

United Arab Emirates

Costa Rica

JordanPeru

United Kingdom

Cote d’Ivoire

Kazakhstan

Philippines

United States

Croatia

Kenya

PolandUruguay

CyprusKuwaitPortugal

Venezuela

Czech Republic

LebanonPuerto Rico

VietnamDenmark

Liechtenstein

Qatar

Virgin Islands, British

Egypt

Lithuania

Romania

Virgin Islands, U.S.

Estonia

Luxembourg

RussiaZambiaFaroe Islands

Macau SAR

Saudi Arabia

FinlandMacedonia (North)

Senegal99

References“What You Need to Know About Impact Investing,” Global Impact Investing Network (GIIN). Available
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standardized“The key differences between SRI, ESG and impact investing,” PitchBook blog, September 1, 2021.
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100

“What is values-based investing – and how can it fit into your philanthropic plan?”, Ascent Private
Capital Management of U.S. Bank, January 27, 2023. Available here: https://ascent.usbank.com/privatecapital-management/ascent-resources-and-insights/investment-strategies/values-based-investing.html
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Available here: https://www.chase.com/personal/investments/learning-and-insights/article/what-isvalues-based-investing101Abbreviations
Abbreviation

Term

CDP

Carbon Disclosure Project (currently, only the CDP abbreviation is used)

CDSB

Climate Disclosure Standards Board

CERES

Coalition of Environmentally Responsible Companies

COP

Conference of Parties

COP21

21st session of the Climate Change Conference of the Parties in Paris in 2015

COP26

26th session of the Climate Change Conference of the Parties in Glasgow in 2021

CSRD

Corporate Sustainability Reporting Directive

EC

European Commission

EFRAG

European Financial Reporting Advisory GroupESG

Environmental, Social, and Governance

ESRS

European Sustainability Reporting Standards

FSB

Financial Stability Board

GHG

Greenhouse Gas

GICS

Global Industry Classification Standard

GRI

Global Reporting Initiative

IAASB

International Auditing and Assurance Standards Board

IASB

International Accounting Standards Board

IESBA

International Ethics Standards Board for Accountants

IFEA

International Foundation of Ethics and Audit

IIRC

International Integrated Reporting Council

IOSCO

International Organization of Securities Commissions

IPCC

Intergovernmental Panel on Climate Change

IRF

Integrated Reporting Framework

ISSB

International Sustainability Standards Board

PRI

Principles for Responsible Investing

SASB

Sustainability Accounting Standards Board

SBTi

Science Based Targets Initiative

SEC

Securities and Exchange Commission

SFRD

Sustainable Finance Disclosure Regulation

SRI

Socially Responsible Investing

TCFD

Taskforce on Climate-Related Financial Disclosures

UN SGD

United Nations Sustainable Development Goals

UNEP

United Nations Environment Programme

UNFCCC

United Nations Framework Convention on Climate Change102

Acknowledgments
Authors
Carla Nunes, CFA, ABVManaging Director+1 215 430 6149
carla.nunes@kroll.com
James Harrington
Director

Anas Aboulamer, PhD
Director

Contributors
Kevin Madden
Director

Molly Jennerman
Senior Associate

Zachary Rodheim
Manager

Kevin Latz
Senior Associate

Xavier Lim
Data Analyst

103Kroll’s ESG Advisory andTechnology Solutions
Creating Value Through Greater ESG Transparency
ESG criteria, regulation and investing across all industries are evolving rapidly to underscore a moresustainable and equitable future for all. As part of this, companies are actively aligning their purpose,
strategies and practices to improve the environment, promote social good and create long-term value.
Adding Value to Clients
Kroll is uniquely placed to assist clients when and where it is needed during their ESG journey through our:
•
•

•
•

ESG experience and insights, built on our strong track record over decades helping clients stayahead of complex demands related to risk, governance and growth
ESG proprietary tools and data, including cloud-based technology and data collection tools,
coupled with our analysis and advice to support clients unlock long-term value and makesustainable decisions
Global reach with local expertise, with over 6,500 experts around the world serving 140 countries
creating value and long-term positive impact for clients and communities
Independence, as we do not have an audit practice and are conflict freeProtecting and Creating Value
Kroll provides an extensive range of ESG advisory support and technology solutions to assist clientsachieve their ESG goals, delivered through core and complementary services as a standalone engagement
or retained service depending on client preferences.
Private equity firms and portfolio companies engage us throughout the transaction and business lifecycles,
leveraging our diverse team’s global experience and insights from disciplines including valuation, corporate
financing and restructuring, regulatory compliance, investigations and disputes.
We help clients to:
Deliver sustainable growth andimprove ESG outcomes

Develop ESG policies andprocedures

Effectively manage andreduce risk and volatility

Align goals to standards
and frameworks

Embed ESG acrossgovernance and processes

Benchmark against peers, industries,
countries and ESG momentum

Navigate and comply withregulation and disclosures reporting104

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Caribbean105

About KrollAs the leading independent provider of risk and financial advisory solutions, Kroll leverages our unique insights, data and technology to help clients stay ahead ofcomplex demands. Kroll’s team of more than 6,500 professionals worldwide continues the firm’s nearly 100-year history of trusted expertise spanning risk,
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