Responsible Investing: The ESG Risk Budgeting

56 Pages Posted: 30 May 2024

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Monica Billio

affiliation not provided to SSRN

Sandra Paterlini

University of Trento - Department of Economics and Management

Runfeng Yang

Università Ca' Foscari Venezia

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

Suggested Citation

Caporin, Massimiliano and Billio, Monica and Paterlini, Sandra and Yang, Runfeng, Responsible Investing: The ESG Risk Budgeting. Available at SSRN: https://ssrn.com/abstract=4848729 or http://dx.doi.org/10.2139/ssrn.4848729

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Monica Billio

affiliation not provided to SSRN ( email )

No Address Available

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Runfeng Yang

Università Ca' Foscari Venezia ( email )

Venice
Italy

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