Comparing Risk and Performance for Absolute and Relative ESG Scores - Empirical Analysis Using MSCI ESG Scores

Aug 24, 2026

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An empirical study evaluates how two MSCI ESG score types relate to financial outcomes: absolute scores (weighted average key issue score) and industry-relative scores (industry-adjusted score). The analysis links both score types to higher profitability indicators and lower idiosyncratic, stock-specific risk, while showing a stronger industry-relative association with cash-flow factors such as gross profitability and a sharper absolute-score relationship to downside idiosyncratic risk. The paper further explores downside risk through equity drawdowns and fixed-income spread spikes, controlling for industry-specific risk. Results are preliminary for fixed income and suggest tailored ESG signal use.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages24

Reading Time1 h 0 min

AccessFree to download

Executive Summary

Introduction

Analytical Approach

Results of Economic Transmission Channel Analysis

Idiosyncratic Risk: Frequency of Stock-Price Drawdowns and Credit Spread Spikes

Conclusion

Appendix 1: ESG Hotspots by Industry

Appendix 2: Hierarchy of Scores at Various Levels

Appendix 3: Design of MSCI ESG Scores

Weighted Average Key Issue Score (WAKIS)

Industry Adjusted Score (IAS)

Appendix 4: Drawdown Frequencies

About MSCI

Comparing Risk and Performance for Absolute and Relative ESG Scores An Empirical Analysis Using MSCI ESG Scores Ankit Sayani, Bentley Kaplan August 2020 Contents Executive Summary ...................................................................... 3 Introduction ................................................................................... 4 Analytical Approach...................................................................... 7 RESULTS OF ECONOMIC TRANSMISSION CHANNEL ANALYSIS ............ 9 IDIOSYNCRATIC RISK: FREQUENCY OF STOCK-PRICE DRAWDOWNSAND CREDIT SPREAD SPIKES....................................................................11 Conclusion .................................................................................. 15 Appendix 1: ESG Hotspots by Industry ...................................... 17 Appendix 2: Hierarchy of Scores at Various Levels .................. 18 Appendix 3: Design of MSCI ESG Scores .................................. 19 WEIGHTED AVERAGE KEY ISSUE SCORE (WAKIS) ..................................19 INDUSTRY ADJUSTED SCORE (IAS) ..........................................................20 Appendix 4: Drawdown Frequencies ......................................... 22 ABOUT MSCI................................................................................................23 Executive Summary ESG investing is undergoing a pivotal shift. Investors are increasingly moving away from asking “if” ESG can add value to their strategies, and towards questions of“how” and “where.” Supported by a growing body of research, the underlying dynamics between ESG scores and financial performance are becoming clearer. In recent work, we teased apart component environmental, social and governance scores to better highlight differences in how they correlate with financial performance. 1 In this paper, we continue the arc of investigation and turn the spotlight on two ESG score types contained within the MSCI ESG letter rating —specifically the absolute (weighted average key issue score) and industry-relative scores (industry-adjusted score) . The industry-relative score provides a “best in class” approach while the absolute score offers an aggregated view of a company’s total potential risks but may not differentiate as well between members of the same industry. As investors debate which type of signal may serve them best, we wanted to test how these different ESG signals correlated with financial performance. A fundamental analysis showed that both scores correlated with higher profitability characteristics and lower levels of idiosyncratic and stock-specific risk. The industryrelative score had a stronger correlation with factors linked to cash-flow, including gross profitability. The absolute score was more useful for differentiating companies’ exposure to idiosyncratic risk. Given the latter result, we further tested how our two ESG scores correlated with downside risk — both in stock-price drawdown events (equity) and spikes in option-adjusted spreads (fixed income) . Controlling for industry-specific risk may have allowed the industry-relative score to better reflect companies’ competitiveness versus their peers and therefore profitability characteristics — potentially making it more useful for stock selection purposes. By contrast, the absolute score’s aggregation of underlying ESG risks offered greater correlation with downside risks — potentially making it more useful for sector allocations or fixed income investors. The results from our fixed income analysis are preliminary and point to intriguing areas for further investigation. More broadly, this work offers a demonstration of how different investment priorities may benefit from a more precise application of ESG scores. The authors thank Karun Jacob for his contributions to this research. 1 Giese, G., Z. Nagy and L.-E. Lee. 2020.“Deconstructing ESG Ratings Performance: Risk and Return for E, S and G

FAQs

What are the absolute and industry-relative ESG score types examined in the paper?

The study focuses on MSCI ESG letter rating components: absolute scores measured via the weighted average key issue score (WAKIS) and industry-relative scores measured via the industry-adjusted score (IAS).

How do the two ESG score types correlate with financial performance and risk?

Both scores correlate with higher profitability characteristics and lower levels of idiosyncratic and stock-specific risk. The industry-relative score correlates more strongly with cash-flow-related factors, while the absolute score is more useful for differentiating exposure to idiosyncratic downside risk.

How is downside risk analyzed beyond general correlations?

Downside risk is tested using stock-price drawdown events for equity and spikes in option-adjusted spreads for fixed income. The fixed income findings are described as preliminary, pointing to areas for further investigation.

Aug 24, 2026

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