The MSCI World ESG Index, which benchmarks the performance of large- and mid-cap companies from 23 developed market countries, has shown growth in recent years. It has outperformed its parent index, MCSI World, in several periods and has outperformed every year since 2019. The exception was 2022, when both indices posted losses. The most notable difference was seen last year, when the MSCI World ESG index performed 26.02 percent compared to 24.42 percent for the MSCI World index, and in 2021, when the difference was the highest by almost 3 per cent. Specifically, it was 25.29 percent versus 22.32 percent for non-ESG companies. In 2020, the performance of the ESG index was lower, at 15.90 percent compared to 16.50 percent for the parent index. 2019 was the best year in five years for both, with MSCI ESG up 28.91 percent and MCSI World up slightly less, 28.4 percent. But let's look at the actual numbers. The parent index's gross return as of October 31, 2024 was $472.70, while the ESG version was just under $470. While the traditional index had a better gross return in the short term, the ESG version of the index performed better in the long term.
When looking at a five- to 10-year period, the ESG index appreciated 12.72 percent and 10.43 percent, respectively, while the parent index averaged a return of about 1 percent lower. However, in addition to the MSCI World ESG Index mentioned above, MSI provides investors with a number of ESG indices focused on different sectors, and looking at their 10-year performance, we see that all are in the green, and with the exception of the index focused on emerging markets, have appreciated from less than 6 percent to more than 17 percent.1*.
The strong long-term performance of ESG assets is also evidenced by PwC's 2022 report, which found that as many as 60 percent of 250 institutional investors have outperformed ESG compared to traditional assets. The outperformance of ESG assets is more pronounced in times of crisis, when companies typically experience lower volatility in their share prices compared to traditional assets. In sectors such as renewables, healthcare and technology, investor confidence has been evident during turbulent economic periods. Particularly during the pandemic, investors had an increased interest in companies in these sectors as they were priorities for the public and businesses. However, their performance is related to several other factors. Companies with strong sustainability credentials have better risk management structures and transparency, while adapting more easily to changing conditions. Their focus on sustainability and ethical management reduces their exposure to controversy, which increases their long-term stability. Investor behaviour also plays an important role. According to ESG Access, which offers companies courses on proper ESG reporting, they are also increasingly prioritising value, creating a steady demand for such focused stocks.
While global markets have adopted sustainability principles on a large scale, the Czech and Slovak region2 are still in the early stages of transition. In recent years, Slovak companies have tended to focus more on CSR (Corporate Social Responsibility) activities and ESG has tended to be the domain of large multinationals. Therefore, local stock exchanges have so far limited the supply of ESG-focused shares.
The Bratislava Stock Exchange reportedly offers the option of green and social bonds.
Among Czech stocks on the Prague Stock Exchange, CEZ Group stands out for its remarkable progress in the area of sustainability. The energy company recently ranked among the top 8% of publicly traded companies in the world according to CSR Hub and also improved its position on the Morningstar Sustainalytics list.* The significant progress with this internationally recognized agency helps the Group to meet its credit obligations and also increases its attractiveness among investors. Other companies listed on the Prague Stock Exchange that received a high ESG rating from the Corporate Social Responsibility Association in November 2023 include MONETA Money Bank and Komerční banka.
ESG stocks have proven themselves internationally as resilient and profitable investments that combine ethical considerations with financial performance, and are becoming a stable part of the portfolios of a growing number of investors. Although the Czech and Slovak markets still have room to grow in this area, advances such as that made by CEZ show their potential.
Olívia Lacenová, principal analyst at Wonderinterest Trading LTD.
1Data as of 29 November 2024
* Past performance is no guarantee of future results.
