ESG: From Heterogeneity to Risk Factor

  Part II: The existence of an ESG risk factor

Published on June 23th, 2022Market and research
Winter in... Coming?
Flageollet

Alexis Flageollet, PhD

Financial Engineer

Juan-Sebastian Caicedo,

Juan Sebastian Caicedo, CFA

Equity Portfolio Manager

Written in March 2022

      

In the first part of this research paper, we showed the significant differences that exist between the ratings from different ESG providers. We concluded that the creation of a composite score reduces this initial heterogeneity while maintaining a high correlation with each individual rating.

  

Find part 1 on data heterogeneity here

  

In this second part, we seek to answer the following question: is there an ESG risk factor? The existence of such a risk factor would imply that ESG discriminates equities between one another. In order to answer this question, we use the ESG composite score to measure the effect of ESG on European equity market’s returns. As a quantitative manager, it seems indeed natural to us to assess the impact of ESG on financial markets through a more objective ESG rating.

    

Access the Equity Insights - Part 2 : The existence of an ESG risk factor

This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.