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ESG risk rating disagreement: implications on portfolio performance

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  • Diana-Mihaela SANDU

    (Bucharest University of Economic Studies, Romania)

Abstract

This paper examines the ESG risk rating disagreement across two-well established rating providers and its implication on portfolio performance. By deriving a proxy for rating disagreement using the average standard deviation of pairwise percentile ranking across Refinitiv and Sustainalytics, this study examined the risk-adjusted performance of high and low disagreement portfolios. For each portfolio, four risk-adjusted measures (Sharpe ratio, Treynor ratio, Modigliani- Squared and Jensen’s alpha) were calculated. In general, the study found that the best performer was the low-disagreement portfolio, but the results were not favourable for any portfolio.

Suggested Citation

  • Diana-Mihaela SANDU, 2024. "ESG risk rating disagreement: implications on portfolio performance," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(638), S), pages 161-168, Spring.
    • Handle: RePEc:agr:journl:v:1(638):y:2024:i:1(638):p:161-168
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    References listed on IDEAS

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    2. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
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    4. N. C. Ashwin Kumar & Camille Smith & Leïla Badis & Nan Wang & Paz Ambrosy & Rodrigo Tavares, 2016. "ESG factors and risk-adjusted performance: a new quantitative model," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 6(4), pages 292-300, October.
    5. Avramov, Doron & Cheng, Si & Lioui, Abraham & Tarelli, Andrea, 2022. "Sustainable investing with ESG rating uncertainty," Journal of Financial Economics, Elsevier, vol. 145(2), pages 642-664.
    6. Florian Berg & Julian F Kölbel & Roberto Rigobon, 2022. "Aggregate Confusion: The Divergence of ESG Ratings [Corporate social responsibility and firm risk: theory and empirical evidence]," Review of Finance, European Finance Association, vol. 26(6), pages 1315-1344.
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