Chasing the Non-Linear ESG Factor

Abstract

We apply a non-linear setting in capturing ESG factors. The non-linear factor captures the pricing of cross-section distribution of ESG scores. We find that the factors for ESG, E, and S scores deviate from linearity. The extent of deviation depends on the type of ESG scores as well as the sample period. We also find evidence of cross-section distribution of ESG scores interacting with climate sentiment when affecting the ESG factors. A change in the ESG data provider will change the non-linear ESG factor. However, the non-linearity still exists using the common sample from different data providers.

Keywords: ESG, ESG Factor, Factor Model, Fama/MacBeth Cross-section