Morgan Stanley Study Correlates Sustainability with Financial Outperformance

Source:, 8 December 2003

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 Dean Witter (ticker: MWD) that finds market outperformance by firms with sustainability best practice.
"The positive 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."

The study 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" portfolio.

"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 management.

Sustainability sector leaders composing the best-in-class portfolio include BMW (BAMXF.PK) 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 sector.

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 23.39 percent.

"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.

The study 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 states.

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 calculations.

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 results robust.

"Our research universe covers 23 industries from the MSCI World, and within these industries we analyse the largest companies listed," Ms. Bammert told "I think that this cross-section including the heavy weights of the MSCI draws a realistic picture."

"However, what we think is most important is that best-in-class outperforms not-best-in-class significantly," she concluded.