Doing Good by Doing Well? The 'Chicken and Egg' Problem in the ESG Alpha Debate

6 Pages Posted: 26 Mar 2024

See all articles by Byung Hyun Ahn

Byung Hyun Ahn

University of California, Berkeley - Haas School of Business

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

George S. Skiadopoulos

University of Piraeus, Department of Banking and Financial Management; Queen Mary, University of London, School of Economics and Finance

Date Written: February 25, 2024

Abstract

We summarize the key findings and practical insights from our study on “Material ESG Alpha: A Fundamentals-Based Perspective.” Our research explores the association between ESG performance and stock returns amid the explosive growth of ESG investing and the growing gap among major US asset managers. Our core argument is that ESG scores do not change in a vacuum. More financially established firms relative to their sector are more likely to not only create material strengths but also resolve material weaknesses in their ESG scoring. This fundamental link is key to explaining prior evidence of material ESG alpha. We explore the value added of commercially available ESG scoring models, the challenges in using alpha for assessing the efficacy of the sustainability reporting standards, and the implications of our work for the SEC proposed rules on ESG disclosures. Our evidence on material ESG alpha gets to the heart of the SEC proposed rules for investment advisers and fund managers and provides a fundamentals-based framework for identifying when ESG factors are generally no more significant than other, non-ESG factors in the investment selection process.

Keywords: ESG Alpha, Materiality, SASB, ESG Ratings, SEC, ESG Disclosures

JEL Classification: G11, G12, G14, M14, M41, Q51

Suggested Citation

Ahn, Byung Hyun and Patatoukas, Panos N. and Skiadopoulos, George and Skiadopoulos, George, Doing Good by Doing Well? The 'Chicken and Egg' Problem in the ESG Alpha Debate (February 25, 2024). Available at SSRN: https://ssrn.com/abstract=4738046 or http://dx.doi.org/10.2139/ssrn.4738046

Byung Hyun Ahn

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://https://sites.google.com/berkeley.edu/panos

George Skiadopoulos

Queen Mary, University of London, School of Economics and Finance

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

HOME PAGE: http://https://sites.google.com/view/george-skiadopoulos

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