Stockholm (NordSIP) – Investors seeking empirical evidence to counter claims of environmental, social, and governance (ESG) factors acting as performance headwinds may be interested in data released by MSCI in a new research report on MSCI ESG Ratings and the Cost of Capital. The company, which provides both market indices and sustainability ratings was looking to determine whether firms’ ability to deal with sustainability-related risks is typically rewarded with a lower cost of capital.
The dataset under scrutiny included 4,319 issuers with equity or bonds represented within MSCI’s All-Country World Index (ACWI) and Corporate Bond Index and for which monthly cost of capital data was available. MSCI tested the relationship between their proprietary ESG ratings and the cost-of-capital over the period from August 2015 to May 2024. The issuers were divided into equally weighted quintiles based on their ESG rating. Efforts were also made to isolate the influence of the ESG ratings by creating control groups to account for unrelated macro factors that might be affecting the outcomes such as home market, sector affiliation, funding currency and credit quality.
MSCI’s report uncovers a significant historical correlation between companies’ ESG ratings and their financing costs in both equity and debt markets. The companies demonstrating the greatest resilience to sustainability-related risks consistently benefitted from cheaper cost of capital.
The report’s authors also determined that these relationships can be measured even more precisely when focusing on the scores relating to the sustainability issues that are most material to individual companies’ sector or industry. For example, greenhouse gas emissions are more significant for heavy industry than for the retail sector. The cost of capital for cement producers Holcim and Cemex was seen to be strongly correlated with their scores on carbon emissions and toxic waste management.
In addition to these observations, the MSCI study sought to measure the effectiveness of the signals as a determinant of future cost of capital changes. The authors conclude that once companies’ ESG ratings change by more than two notches in MSCI’s scale there is an identifiable pattern of cost of capital improvement that can be used a forward-looking signal.
