Morningstar - Q2 2020 - 58

Strategies

EXHIBIT 2

ESG
of independent ESG research with global
coverage of public companies. (Morningstar holds
a noncontrolling interest in Sustainalytics.)

Comparing Cumulative Returns of ESG Portfolios

The three global ESG portfolios closely tracked each other, resulting in an almost
ESG BMW factor portfolio.

managing a range of ESG issues relative to its
industry peer groups.

Worse

From there, we sorted the stocks into three groups
and made an equal-weighted portfolio for each:

Worse

Medium

Better

Cumulative Return

ESG BMW

3.0

Medium

Better

Cumulative2.29
Return

ESG BMW

2.23 3.0
2.19 2.0
2.29

gThe Better ESG portfolio included companies
in the highest third.
gThe Medium ESG portfolio included companies
in the middle third.
gThe Worse ESG portfolio included companies
in the lowest third.

We then calculated the monthly return of the
overall ESG BMW portfolio as the average
return of the Better ESG portfolio minus that of
the Worse ESG portfolio. If the market is placing
a higher premium on good ESG stocks than
on bad ones (meaning they're priced higher and
then returned less), thus creating an ESG
risk premium, we would expect the return on the
overall portfolio to be negative on average.
A Look at the Attributes of ESG Companies
In E X H I B I T 1 , we list attributes of the global
and U.S./Canada ESG portfolios. When
we compared the attributes of the three global
portfolios, we found that companies with
Better ESG
capitalization and more mature with higher
earnings and dividend yield. For average monthly
ESG group.

The U.S. and Canada ESG portfolios exhibited
similar characteristics to the global portfolios.
However, we also saw an inverse relationship
between ESG score and monthly return: The Better
ESG portfolio had a monthly return of 0.89 ,
compared with 1.0 from the Worse ESG portfolio.
high-scoring U.S. and Canadian securities
may pay a penalty.
Differences in Risk and Return
We then examined the cumulative returns for each

58

Morningstar 2 2020

2.23
2.19 2.0
1.01 1.0

1.01 1.00

08/31/2009

08/31/2011

08/31/2013

08/31/2015

05/31/2019

In the U.S./Canada portfolios, the Better ESG portfolio trailed the others, resulting in0
Medium
Better
ESG
BMW
Cumulative Return
08/31/2011
08/31/2013
08/31/2015
05/31/2019
a consistent negative return for the U.S./Canada ESG BMW portfolio.
4.0

Worse
08/31/2009

Worse

Medium

Better

Cumulative3.12
Return

ESG BMW

4.0
2.98 3.0
2.57
3.12

2.0
2.98 3.0
2.57
0.81

08/31/2009

08/31/2011

08/31/2013

08/31/2015

05/31/2019

08/31/2009

08/31/2011

08/31/2013

08/31/2015

05/31/2019

0.81

1.0
2.0
0
1.0
0

Source: Morningstar Direct. Data as of 05/31/2019.

ESG portfolio ( E X H I B I T 2 ). We found that the
three global ESG portfolios closely tracked each

.
for the cumulative return of the global ESG BMW
factor portfolio.
However, in the U.S. and Canada, we again see
evidence that there may be a premium for tilting
toward ESG companies ( E X H I B I T 2 ). The Worse

ESG portfolio earned a 312 return over the
sample period, while the Medium and Better
portfolios earned only 298 and 257 , respectively.
This resulted in a consistent negative return for
the U.S./Canada ESG BMW portfolio.

Based on the portfolio returns, we then calculated
risk and return statistics ( E X H I B I T 3 ). The
monthly returns, standard deviation, and Sharpe
ratios of the global ESG portfolios were not



Morningstar - Q2 2020

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Morningstar - Q2 2020 - Cover1
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