ESG-screening and factor-risk-adjusted performance: the concentration level of screening does matter

Ick Jin

Journal of Sustainable Finance & Investment, 2022, vol. 12, issue 4, 1125-1145

Abstract: Constructing ESG-screened portfolios aims to reduce the aggregate ESG-risk at the portfolio level by excluding low ESG-score constituents from the selection universe. But ESG-screening imposes limits on potential diversification as well as alters risk exposures to systematic factors. To investigate ESG-screening’s impact on the factor-risk-adjusted performance of portfolios, we construct ESG-screened portfolios consisting of US equity mutual funds according to their returns-based ESG-scores. The result of performance contribution analysis for the sample period from 1999 to 2018 suggests that investors need to treat the concentration level of ESG-screening as a search parameter to balance the costs and benefits of ESG-screening.

Date: 2022
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DOI: 10.1080/20430795.2020.1837501

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