An analysis of more than 2,500 components of the MSCI ACWI Index revealed that companies that more effectively managed their financially material sustainability risks attracted significantly greater indexed flows when assessed under MSCI’s Sustainability and Climate (S&C) Indexes.
Specifically, companies with an MSCI ESG Rating of AAA received 15 times more indexed capital than those rated CCC, normalized by market capitalization, according to a note signed by analysts Kishan Gangadia and Reil Abucay.
Similarly, companies within the MSCI S&C Indexes that exhibited a lower “MSCI Implied Temperature Rise (ITR)” were associated with higher indexed flows, again adjusted for company size. Companies with an ITR aligned to 1.5 °C attracted more than twice the passive flows compared to those with a misaligned ITR above 5.0 °C.
MSCI has long noted empirical, long-term evidence of the financial benefits for companies that effectively manage their sustainability risks, including outperformance in equity markets, lower option-adjusted credit spreads, and more stable revenues and cash flows. With over one trillion dollars in assets under management (AUM) now benchmarked to MSCI’s S&C Indexes, these reference indices are increasingly shaping actual capital flows.
Therefore, it is increasingly valuable for companies to understand how their sustainability profile compares with that of their peers and to identify improvements that could help capitalize on the potential financial benefits of index inclusion—from greater indexed flows to lower borrowing costs.
