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Comparing Risk and Performance for Absolute and Relative ESG Scores

categories: Americas, Asia Pacific, Australia, EMEAI, Environmental, Social, Governance, SAYANI Ankit, KAPLAN Bentley, Portfolio Construction and Optimization, Responsible Investing, Asset Managers (Quant or Fundamental), Asset Owners, Banks, Hedge Funds, ESG Products & Services, Equities, Fixed Income

ESG investing is undergoing a pivotal shift. Investors are increasingly moving away from asking “if” ESG can add value to their strategies, and toward questions of “how” and “where.” As investors debate whether an absolute or industry-relative score may serve them better, we tested how these different ESG signals correlated with financial performance. Both scores correlated with higher profitability characteristics and lower levels of idiosyncratic and stock-specific risk. The industry-relative score had a stronger correlation with factors linked to cash-flow, including gross profitability. The absolute score was more useful for differentiating companies’ exposure to idiosyncratic risk.

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