December 05, 2003
Morgan Stanley Study Correlates Sustainability with Financial Outperformance
by William Baue
Morgan Stanley's joint study with Oekom Research finds that sustainability leaders in the MCSI
World Index financially outperformed sustainability laggards over the past four years.
The business case for sustainability investment is gaining momentum and moving into the mainstream.
Earlier this week, Oekom
Research, a Munich-based sustainability rating firm, released a study jointly conducted with
Morgan Stanley (ticker: MS) that finds market
outperformance by firms with sustainability best practice.
correlation between sustainability and financial performance will provide an enormous boost to the
sustainable investment sector," said Markus Knisel, director of Morgan Stanley Private Wealth
Management. "Morgan Stanley definitely aims to be part of this development."
examined the 602 companies in the Morgan Stanley Capital International (MSCI) World Index that have received Oekom's Corporate
Responsibility Ratings (CRR), which assess companies' social and environmental performance on 200
criteria. These companies constitute about 80 percent of the market capitalization value of the
MSCI World Index. Oekom assigns a rating from A+ (best) to D- (worst). Of the MCSI World Index
constituent companies rated by Oekom, 186 were judged to be sustainability leaders in their
respective sectors. Oekom and Morgan Stanley gathered these companies into a "best-in-class"
"The minimum grade to become best-in-class varies between C+ and C-," said
Marnie Bammert, Oekom's manager of corporate communications. Oekom's analyses influence the
investment decisions of 20 equity and bond portfolios with more than €800 million in assets under
Sustainability sector leaders composing the best-in-class portfolio include
BMW (BMW) in the
auto sector, HP (HPQ) in the computer sector, EMI
Group (EMI.L) in
the media sector, and Deutsche Telekom (DT) in the telecommunications
The remaining 416 companies, which received lower ratings for their environmental
and social responsibility performance, were placed in a second portfolio. Morgan Stanley
calculated the share performance of each portfolio from December 31, 1999 through October 27, 2003,
and found that the best-in-class portfolio outperformed the sustainability laggards portfolio by
"We are convinced that high sustainability performance stems from superior
company management and will in the long run manifest itself in improved financial performance,"
said Robert Haßler, Oekom's managing director.
Oekom cites independent studies that find
similar premiums for sustainability best practitioners.
"The shares of companies that do
business in an environmentally and socially more compatible way have a lower risk of share price
fluctuations than companies from the same industry, relative to the entire market," states a 2002
study conducted by Switzerland-based Bank Sarasin.
posits some possible reasons for the positive correlation of financial and sustainability
performance. It speculates that good sustainability performance leads to good financial
performance through the integration of sustainability criteria into corporate strategy; for
example, increased energy efficiency leads to lower costs. The study hypothesizes that this
dynamic also works in the opposite direction, with good financial performance leading to good
sustainability performance, as companies with higher profits can afford to implement higher
environmental and social standards. Finally, the study suggests that good management leads to good
financial and sustainability performance
"Companies with good sustainability performance
feature overall superior management that results in better financial performance," the study
In addition to outperforming the laggards portfolio, the best-in-class portfolio
also performed competitively in comparison to the broader market.
On a year-to-date basis,
the best-in-class portfolio outperformed the MCSI World Index by 3.76 percent. Although it would
be elucidating to consider other comparisons, such as both portfolios against the MCSI World Index
over the past four years, Oekom Research did not ask Morgan Stanley to conduct any other
And although the study's parameters exclude approximately 20 percent of the
MCSI World Index, namely those companies that Oekom has not yet rated, Oekom still considers the
"Our research universe covers 23 industries from the MSCI World, and
within these industries we analyse the largest companies listed," Ms. Bammert told SocialFunds.com.
"I think that this cross-section including the heavy weights of the MSCI draws a realistic
"However, what we think is most important is that best-in-class outperforms
not-best-in-class significantly," she concluded.