RESPONSIBLE INVESTING: THE ESG-EFFICIENT FRONTIER Flashcards
Describe the construction of the ESG-SR frontier as outlined in the theoretical part of the paper.
The ESG-SR frontier represents the maximum Sharpe ratio (SR) achievable at each level of ESG. Portfolios on this frontier are combinations of the risk-free asset, the tangency portfolio, the minimum-variance portfolio, and the ESG-tangency portfolio.
What are the three types of investors considered in the theoretical part, and how do they differ in their approach to ESG?
The three types of investors are Type-U (ESG-unaware), Type-A (ESG-aware), and Type-M (ESG-motivated). They differ in their consideration of ESG information in their investment decisions.
What measures are used for the environmental (E), social (S), and governance (G) components of ESG in the empirical part of the study?
For E, low carbon intensity is measured as carbon emissions/sales. For S, the distinction is made between non-sin stocks (assigned a value of 1) and sin stocks (assigned a value of 0). For G, low accruals are used as a proxy, indicating conservative accounting practices.
What important conclusions are drawn from the empirical analysis regarding the impact of ESG on returns?
The empirical analysis reveals mixed results regarding the correlation of ESG factors with future fundamentals. However, there is strong demand for high-ESG stocks, leading to high valuations and low expected returns. Conversely, G factors show both strong correlation with future fundamentals and high returns, indicating underpricing by the market.
