Deconstructing ESG scores: investing at the category score level

Torsten Ehlers, Ulrike Elsenhuber (), Anandakumar Jegarasasingam () and Eric Jondeau ()
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Ulrike Elsenhuber: Bank for International Settlements
Anandakumar Jegarasasingam: Bank for International Settlements
Eric Jondeau: University of Lausanne

Journal of Asset Management, 2024, vol. 25, issue 3, No 2, 222-244

Abstract: Abstract 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.

Keywords: Sustainable investment; ESG ratings; ESG investing; Negative screening; Best-in-class screening (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-024-00356-1

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