Responsible Investing: The ESG Risk Budgeting
56 Pages Posted: 30 May 2024
Abstract
We propose a new risk budgeting framework to measure the ESG systematic risk impact in the financial market. Empirical analysis on the European stock market from 2013 to 2022 reveals limited evidence of overall ESG risk impacts. However, we find significant ESG risk impacts in specific sector/ESG groups and during periods of extreme market events. Notably, actively pursuing ESG risk exposure can result in substantial risk-return trade-offs. These impacts are also influenced by measurement errors in the ESG score. These findings point out the complexities of including ESG elements in investment strategies.
Keywords: ESG, ESG Systematic Risk, Factor Model, efficient frontier
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