ESG: From Heterogeneity to Risk Factor
Part II: The existence of an ESG risk factor
Alexis Flageollet, PhD
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.
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