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Deconstructing ESG Ratings Performance: Risk and Return for E, S And G by Time Horizon, Sector and Weighting

categories: Research Paper, Materials, Utilities, Americas, Asia Pacific, Australia, EMEAI, Environmental, Governance, Social, GIESE Guido, NAGY Zoltan, LEE Linda-Eling, Investing (Investment Management), Portfolio Construction and Optimization, Responsible Investing, Asset Managers (Quant or Fundamental), Asset Owners, Banks, Hedge Funds, Wealth, Indexes, ESG Products & Services, ESG Indexes, ESG Ratings, Research, Equities

How are environmental, social and governance (ESG) ratings constructed? Which indicators are the most important in assessing ESG characteristics? Does the answer vary by sector? This foundational paper examines the impact on financial performance of two types of ESG indicators: the individual E, S and G pillars scores and the underlying ESG Key Issue scores. They found that these indicators related differently to companies’ financial performance and challenges the conventional wisdom that “G” is the dominant contributor to ESG ratings performance.

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