Determinants of Portfolio ESG Performance: An Attribution Framework

Abstract

We develop a parsimonious attribution framework for evaluating the ESG performance of a portfolio. Our attribution model decomposes portfolio ESG performance into three principal components: a value effect, a weighting effect, and an interaction effect. We illustrate our approach using the equity portfolios of U.S. public pension funds over time. We find that U.S. public pensions’ positive ESG performance over the past decade is mainly due to their underlying holdings boosting their ESG scores over this period. By contrast, pension portfolio weight changes in high and low ESG-scoring firms over this period contributed negatively to their ESG performance, both in absolute terms and relative to the market portfolio. Furthermore, public pensions’ portfolio weighting behavior (the weighting effect) explains most of the variation in their ESG performance. Our findings suggest that our ESG attribution framework can help meet the demand for transparency regarding the ESG performance of investment assets.

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Keywords: ESG investing, performance attribution, public pensions

JEL Classification: B40, G11, G23, Q50