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Integrating sustainability risks in asset management: the role of ESG exposures and ESG ratings

Author

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  • Benjamin Hübel

    (Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU))

  • Hendrik Scholz

    (Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU))

Abstract

The rising sustainability awareness among regulators, consumers and investors results in major sustainability risks of firms. We construct three ESG risk factors (Environmental, Social and Governance) to quantify the ESG risk exposures of firms. Taking these factors into account significantly enhances the explanatory power of standard asset pricing models. We find that portfolios with pronounced ESG risk exposures exhibit substantially higher risks, but investors can compose portfolios with lower ESG risks while keeping risk-adjusted performance virtually unchanged. Moreover, investors can measure the ESG risk exposures of all firms in their portfolios using only stock returns, so that even stocks without qualitative ESG information can be easily considered in the management of ESG risks. Indeed, strategically managing ESG risks may result in potential benefits for investors.

Suggested Citation

  • Benjamin Hübel & Hendrik Scholz, 2020. "Integrating sustainability risks in asset management: the role of ESG exposures and ESG ratings," Journal of Asset Management, Palgrave Macmillan, vol. 21(1), pages 52-69, February.
    • Handle: RePEc:pal:assmgt:v:21:y:2020:i:1:d:10.1057_s41260-019-00139-z
    DOI: 10.1057/s41260-019-00139-z
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    7. Gallucci, Carmen & Santulli, Rosalia & Lagasio, Valentina, 2022. "The conceptualization of environmental, social and governance risks in portfolio studies A systematic literature review," Socio-Economic Planning Sciences, Elsevier, vol. 84(C).
    8. Ahmad Firdhauz Zainul Abidin & Hafiza Aishah Hashim & Akmalia Mohamad Ariff & Waleed M. Al‐ahdal, 2024. "Ethical commitment, institutional investors and financial performance: Malaysian evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 1042-1056, January.
    9. Panos Xidonas & Eric Essner, 2024. "On ESG Portfolio Construction: A Multi-Objective Optimization Approach," Computational Economics, Springer;Society for Computational Economics, vol. 63(1), pages 21-45, January.
    10. VASIU Diana Elena & BRATU Renate, 2022. "An Overview On Environmental Social And Governance – Esg-Topics From The Financial Markets’ Perspective," Management of Sustainable Development, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 14(2), pages 76-82, December.
    11. Champagne, Claudia & Coggins, Frank & Sodjahin, Amos, 2022. "Can extra-financial ratings serve as an indicator of ESG risk?," Global Finance Journal, Elsevier, vol. 54(C).
    12. Costanza Torricelli & Beatrice Bertelli, 2022. "ESG screening strategies and portfolio performance: how do they fare in periods of financial distress?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0087, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    13. Hübel, Benjamin, 2022. "Do markets value ESG risks in sovereign credit curves?," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 134-148.
    14. Charl de Villiers & Jing Jia & Zhongtian Li, 2022. "Corporate social responsibility: A review of empirical research using Thomson Reuters Asset4 data," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4523-4568, December.
    15. Maria Folqué & Elena Escrig‐Olmedo & Teresa Corzo Santamaría, 2021. "Sustainable development and financial system: Integrating ESG risks through sustainable investment strategies in a climate change context," Sustainable Development, John Wiley & Sons, Ltd., vol. 29(5), pages 876-890, September.
    16. Liyuan Meng & Yuchen Zhang, 2023. "Impact of Tax Administration on ESG Performance—A Quasi-Natural Experiment Based on China’s Golden Tax Project III," Sustainability, MDPI, vol. 15(14), pages 1-23, July.
    17. Zanin, Luca, 2023. "A flexible estimation of sectoral portfolio exposure to climate transition risks in the European stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    18. Zhi Chen, 2023. "Investigate The ESG Score Methodology," Papers 2312.00202, arXiv.org, revised Jan 2024.
    19. Xiaodong Teng & Yanzhi Wang & Aiguo Wang & Bao-Guang Chang & Kun-Shan Wu, 2021. "Environmental, Social, Governance Risk and Corporate Sustainable Growth Nexus: Quantile Regression Approach," IJERPH, MDPI, vol. 18(20), pages 1-15, October.
    20. Reon Matemane & Tankiso Moloi & Michael Adelowotan, 2022. "Appraising Executive Compensation ESG-Based Indicators Using Analytical Hierarchical Process and Delphi Techniques," JRFM, MDPI, vol. 15(10), pages 1-19, October.

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    More about this item

    Keywords

    ESG ratings; ESG exposures; Risk management; Stock returns; CSR;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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