The Drivers of ESG Returns

In the first half of 2020, as the COVID-19 crisis affected financial markets, all standard MSCI ACWI ESG equity indexes outperformed their market-capitalization benchmarks. Where has this outperformance come from? Have inflows into ESG investments driven up equity valuations, possibly creating a price bubble? We used the MSCI GEMLTESG factor model to get a better understanding of performance. The findings provide an economic rationale for categorizing ESG as a fundamental factor that typically derives returns from long-term earnings growth.