Does ESG matter more than Tracking Error ?

Serge Darolles and John Coadou
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Serge Darolles: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: The surge of interest in socially responsible investment (SRI) over the last decade has generated a shift in investors' beliefs but also new challenges to assess. Both passive and active investment management step in this new field, integrating extra financial data within the investment process. However, this trend opens Pandora's box for active portfolio managers. A new ESG-related track error induced by the integration of non-pecuniary factors within the decision-making process emerges. It is investigated whether investors may unconsciously favour securities presenting features in line with fundamental portfolio guidelines, namely better ESG quality and optimal Index tracking. To do so, a proxy for an ESG-beta-related factor was combined with the Fama and French framework. Time series regressions performed on the MSCI USA stocks from January 2014 to January 2021 show that the new factor is statistically significant after controlling ESG and Low beta factors.

Date: 2023-12
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Published in The 17th International Conference on Computational and Financial Econometrics (CFE 2023), Dec 2023, Berlin, Germany

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04581456

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