Linda-Eling Lee

When we first published our annual ESG trends to watch a decade ago, climate change, the value of human and natural capital, and conflicting demands for water all made the list. The risks of a changing climate, health and safety, and our dependence on nature echoed in one form or another in each of the annual forecasts that followed.

While looking out a year won’t tell you what comes next, the act of considering annually what lies ahead shows that if you have a long enough horizon, the… Show more

When we first published our annual ESG trends to watch a decade ago, climate change, the value of human and natural capital, and conflicting demands for water all made the list. The risks of a changing climate, health and safety, and our dependence on nature echoed in one form or another in each of the annual forecasts that followed.

While looking out a year won’t tell you what comes next, the act of considering annually what lies ahead shows that if you have a long enough horizon, the ESG risks of today can end up changing the risk profile for investors tomorrow.

Each of these trends is shaping society. Together they hint at the risks and opportunities that may exert a pull on investment portfolios, and the forces that investors may be confronting, in the years and decades to come. Show less

Interest in measuring companies’ behavior along economic, social, and governance (ESG) criteria reflects two important objectives: social values and financial performance. Nevertheless, measuring these has been difficulty, leading to confusion about ESG investing’s effectiveness. New data and analytical innovations have supported efforts to separate material factors driving investment risk and return from those relevant primarily to social objectives. This paper reviews evidence on the… Show more

Interest in measuring companies’ behavior along economic, social, and governance (ESG) criteria reflects two important objectives: social values and financial performance. Nevertheless, measuring these has been difficulty, leading to confusion about ESG investing’s effectiveness. New data and analytical innovations have supported efforts to separate material factors driving investment risk and return from those relevant primarily to social objectives. This paper reviews evidence on the effectiveness of social value-based versus financially relevant measures and identifies financially material factors, so as to guide pension fiduciaries and other investors on using ESG factors to meet investment objectives. Show less

How are environmental, social and governance (ESG) ratings constructed? Which indicators are the most important in assessing ESG characteristics? Does the answer vary by sector? This foundational paper examines the impact on financial performance of two types of ESG indicators: the individual E, S and G pillars scores and the underlying ESG Key Issue scores. They found that these indicators related differently to companies’ financial performance and challenges the conventional wisdom that “G”… Show more

How are environmental, social and governance (ESG) ratings constructed? Which indicators are the most important in assessing ESG characteristics? Does the answer vary by sector? This foundational paper examines the impact on financial performance of two types of ESG indicators: the individual E, S and G pillars scores and the underlying ESG Key Issue scores. They found that these indicators related differently to companies’ financial performance and challenges the conventional wisdom that “G” is the dominant contributor to ESG ratings performance. Show less

Climate. ESG bubbles. Disclosure. Social inequality. Biodiversity. Big and systemic themes will shape the ESG investment market in the coming year. These are the five ESG and climate trends we think will matter most in 2021.

While governance showed more financial significance in the short term, environmental and social issues’ contributions to stock-price performance unfolded largely over our full 13-year study period.

This paper uses the study of two ESG data vendors – KLD and Innovest – to exemplify the “social origins of ESG” argument made by Eccles and Stroehle (2018). Based on in-depth interviews with the organizations’ founders and historical document analysis, we recap the history of the cases and show how different origins, philosophies, and “purposes” of ESG shaped the methods and data characteristics of two of the most important data vendors of their time. We discuss why MSCI chose to continue with… Show more

This paper uses the study of two ESG data vendors – KLD and Innovest – to exemplify the “social origins of ESG” argument made by Eccles and Stroehle (2018). Based on in-depth interviews with the organizations’ founders and historical document analysis, we recap the history of the cases and show how different origins, philosophies, and “purposes” of ESG shaped the methods and data characteristics of two of the most important data vendors of their time. We discuss why MSCI chose to continue with the financial value-oriented methodology of Innovest, while discontinuing the values-driven KLD. We show that not only the creation, but also the use of “non-financial performance” concepts rely on processes of social construction. Finally, with this paper we join the call for more explicit contextualization of ESG data, highlighting that both practitioners and academics need to better understand the social construction that underlies analyses which use different concepts of ESG. Show less

Many studies have focused on the relationship between companies with strong environmental, social, and governance (ESG) characteristics and corporate financial performance. However, these have often struggled to show that positive correlations—when produced—can in fact explain the behavior. The authors of this article provide a link between ESG information and the valuation and performance of companies, by examining three transmission channels within a standard discounted cash flow model—which… Show more

Many studies have focused on the relationship between companies with strong environmental, social, and governance (ESG) characteristics and corporate financial performance. However, these have often struggled to show that positive correlations—when produced—can in fact explain the behavior. The authors of this article provide a link between ESG information and the valuation and performance of companies, by examining three transmission channels within a standard discounted cash flow model—which they call the cash-flow channel, the idiosyncratic risk channel, and the valuation channel. Show less

Investors are still digesting the U.S. Department of Labor’s new guidance on environmental, social and governance (ESG) investing. Our initial take: We think the guidance supports consideration of the financial merits of ESG investing.

Has CEO pay reflected long-term stock performance? In a word, “no.” Companies that awarded their Chief Executive Officers higher pay incentive levels had below-median returns, based on a sample of 429 large-cap U.S. companies observed from 2005 to 2015. On a 10-year cumulative basis, total shareholder returns of those companies whose total summary pay was below their sector median outperformed those companies where pay exceeded the sector median by as much as 39%. For long-term institutional… Show more

Has CEO pay reflected long-term stock performance? In a word, “no.” Companies that awarded their Chief Executive Officers higher pay incentive levels had below-median returns, based on a sample of 429 large-cap U.S. companies observed from 2005 to 2015. On a 10-year cumulative basis, total shareholder returns of those companies whose total summary pay was below their sector median outperformed those companies where pay exceeded the sector median by as much as 39%. For long-term institutional investors, this potential misalignment of interests between CEOs and shareholders could undermine the adoption of equity-based incentive pay that has dominated executive pay practices in the U.S. for the past three decades. Show less

Do institutional investors sacrifice risk-adjusted returns by incorporating ESG considerations? In this paper, we analyze two relatively high tracking error global strategies constructed using ESG data — a Tilt strategy and a Momentum strategy — and find that both model portfolios outperformed the MSCI World Index over the last eight years, while also improving the ESG profile of the portfolios. These backtested model portfolios show an example of how institutional investors with the tolerance… Show more

Do institutional investors sacrifice risk-adjusted returns by incorporating ESG considerations? In this paper, we analyze two relatively high tracking error global strategies constructed using ESG data — a Tilt strategy and a Momentum strategy — and find that both model portfolios outperformed the MSCI World Index over the last eight years, while also improving the ESG profile of the portfolios. These backtested model portfolios show an example of how institutional investors with the tolerance to take some active risk, while at the same time looking to improve the ESG profile of their portfolios on a systematic basis, could incorporate such strategies in their investment processes. Show less

Many institutional investors are increasingly focused on the gender composition of company boards. Our latest research shows that companies in the MSCI World Index with strong female leadership generated a Return on Equity of 10.1% per year versus 7.4% for those without, as of September 9, 2015, though we could not establish causality. We found that companies lacking board diversity suffered more governance-related controversies than average. Global asset owners are promoting a 30% global..

Since our analysis in December 2013 on the diversity of tax rates paid by MSCI World companies, the regulatory outlook has shifted substantially. In our updated analysis, we identify 243 companies (out of 1,093 relevant1 companies within the MSCI World Index constituents) as having a large tax gap, paying an average rate of 17.7%, versus 34.0%, if these companies were paying taxes in the jurisdictions where they generate revenues.

As the global economy copes with the unpredictable challenges of climate change, institutional investors are exploring the potential impact of these changes on financial assets. This paper provides a framework for evaluating ways to reduce two dimensions of carbon exposure – current carbon emissions and potential future emissions embedded in fossil fuel reserves — and explores new and more financially viable ways of managing carbon risk.

with Boris Groysberg