Deconstructing ESG scores: investing at the category score level

Environmental, social, and governance (ESG) scores are a key tool for asset managers in designing and implementing ESG investment strategies. They, however, amalgamate a broad range of fundamentally different factors, creating ambiguity for investors as to the underlying drivers of higher or lower E...

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Bibliographic Details
Published in:Journal of asset management 2024-05, Vol.25 (3), p.222-244
Main Authors: Ehlers, Torsten, Elsenhuber, Ulrike, Jegarasasingam, Anandakumar, Jondeau, Eric
Format: Article
Language:English
Subjects:
Annual reports
Climate change
Disclosure
Economics and Finance
Emissions
Finance
Financial performance
Financial Services
Institutional investments
Investment advisors
Investors
Original Article
Ratings & rankings
Risk Management
Social investing
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Summary:Environmental, social, and governance (ESG) scores are a key tool for asset managers in designing and implementing ESG investment strategies. They, however, amalgamate a broad range of fundamentally different factors, creating ambiguity for investors as to the underlying drivers of higher or lower ESG scores. We explore the feasibility and performance of more targeted investment strategies based on specific ESG categories by deconstructing ESG scores into their granular components. We implement “best-in-class” strategies by excluding firms with the lowest category scores and reinvesting the proceeds in firms with the highest scores, maintaining the same regional and sectoral composition. These approaches reduce the portfolio’s tracking error and slightly improve its risk-adjusted performance, while still yielding large gains in targeted ESG scores.
ISSN:1470-8272
1479-179X
DOI:10.1057/s41260-024-00356-1