Cambridge Associates October 2016: Our examination of incorporation of environmental, social, and governance factors into the stock selection process for two major MSCI indexes finds evidence that ESG factors added value in emerging markets equities but not developed markets equities

Examination of the first three years data for the new MSCI Emerging Markets ESG Index provides early but consistent evidence that ESG–based stock selection can add value after accounting for the impact of other factors such as style, country, and sector exposure. Analysis of available ESG data for the preceding six and half years broadly indicates the same. Š For the nearly six-year period that could be examined for developed markets, MSCI World ESG slightly underperformed MSCI World, much of which was attributable to poor selection of US stocks. Š Given these findings, investors evaluating managers would do well to focus on understanding if and how the manager incorporates ESG factors, for what reason and how consistently, and whether ESG-based stock selection has added value to their funds.

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