ESG: A New Dimension in Portfolio Allocation

37 Pages Posted: 2 Dec 2020

See all articles by Jan De Spiegeleer

Jan De Spiegeleer

RiskConcile

Stephan Höcht

Technische Universität München (TUM)

Daniel Jakubowski

affiliation not provided to SSRN

Sofie Reyners

KU Leuven - Department of Mathematics

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: October 16, 2020

Abstract

In this paper, we examine the impact of including environmental, social and governance (ESG) criteria in the allocation of equity portfolios. We focus on the risk and return characteristics of the resulting ESG portfolios and investment strategies. Two specific measures are considered to quantify the ESG performance of a company; the ESG rating and the greenhouse gas (GHG) emission intensity. For both measures, we carry out empirical portfolio analyses with assets in either the STOXX Europe 600 or the Russell 1000 index. The ESG rating data analysis does not provide clear-cut evidence for enhanced performance of portfolios with either high or low ESG scores. We moreover illustrate that the choice of rating agency has a significant impact on the performance of the resulting ESG-constrained portfolios. Secondly, we study the impact of GHG emission reductions and increases. We show that emission reductions do not necessarily lead to increased risk or diminished returns, which gives confidence in a smooth transition towards the green economy pursued by the European Green Deal.

Keywords: ESG, portfolio allocation, investment strategies, ESG ratings, greenhouse gas intensity

JEL Classification: G11, Q50

Suggested Citation

De Spiegeleer, Jan and Höcht, Stephan and Jakubowski, Daniel and Reyners, Sofie and Schoutens, Wim, ESG: A New Dimension in Portfolio Allocation (October 16, 2020). Available at SSRN: https://ssrn.com/abstract=3712857 or http://dx.doi.org/10.2139/ssrn.3712857

Jan De Spiegeleer

RiskConcile ( email )

Kapeldreef 60
Leuven, 3000
Belgium
492227143 (Phone)

HOME PAGE: http://www.riskconcile.com

Stephan Höcht

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Daniel Jakubowski

affiliation not provided to SSRN

Sofie Reyners (Contact Author)

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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