ESG-Screening and Factor-Risk-Adjusted Performance: The Concentration Level of Screening Does Matter
Jin, I. 2020. “ESG-screening and factor-risk-adjusted performance: the concentration level of screening does matter,” Journal of Sustainable Finance & Investment, DOI:10.1080/20430795.2020.1837501
42 Pages Posted: 5 Jan 2021
Date Written: October 17, 2020
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.
Keywords: ESG; ESG Screening; ESG Score; Concentration Level of Screening; Factor-Risk-Adjusted Performance; Specific Risk; Systematic Risk; Performance Contribution; Responsible Investing; Downside Protection
JEL Classification: C15, G11, G12, G13, G22, G33
Suggested Citation: Suggested Citation