Chasing the ESG factor

Abraham Lioui and Andrea Tarelli

Journal of Banking & Finance, 2022, vol. 139, issue C

Abstract: We analytically compare two dominant methodologies for the construction of an ESG factor: the time-series (ratings used to sort stocks) and cross-sectional (ratings used to weight stocks) approaches. Differences in ESG rating and exposure to other firm characteristics imply an ex ante expected return spread between the two factors. We construct a cross-sectional factor (i) featuring a targeted rating, thus allowing comparability with other factors, (ii) neutralizing exposure to other firm characteristics, and (iii) not harming diversification through stock screening. Using ratings from several data vendors, we document strong variations of the factor alpha in the time series and across vendors. The conditional alpha is negatively related to the level of media attention for ESG and positively related to variations in media attention.

Keywords: ESG; Factor investing; Cross-sectional asset pricing; Media attention (search for similar items in EconPapers)
JEL-codes: G12 G19 J71 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:139:y:2022:i:c:s0378426622000929

DOI: 10.1016/j.jbankfin.2022.106498

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