ESG and Quality Are Not the Same

Abstract

There is a perception from some investors that ESG and quality approaches are either very similar or that claims of ESG outperformance might in fact be capturing an unintended exposure to the well-documented quality factor instead. The authors enter the debate on this topic by using a 3 × 3 framework to further analyze ESG and quality in the main equity regions, arguing the following: (1) that ESG can be deconstructed into three metrics—E (environmental), S (social), and G (governance); (2) that quality can broadly be thought of as representing three features of corporate performance—profitability, growth, and stability; and (3) that these relationships can usefully be examined across the three main equity regions—North America, Europe, and the emerging markets. The authors report nuances from this more granular approach.