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Deconstructing ESG scores: investing at the category score level

Author

Listed:
  • Torsten Ehlers

    (International Monetary Fund)

  • Ulrike Elsenhuber

    (Bank for International Settlements)

  • Anandakumar Jegarasasingam

    (Bank for International Settlements)

  • Eric Jondeau

    (University of Lausanne)

Abstract

Environmental, social, and governance (ESG) scores are a key tool for asset managers in designing and implementing ESG investment strategies. They, however, amalgamate a broad range of fundamentally different factors, creating ambiguity for investors as to the underlying drivers of higher or lower ESG scores. We explore the feasibility and performance of more targeted investment strategies based on specific ESG categories by deconstructing ESG scores into their granular components. We implement “best-in-class” strategies by excluding firms with the lowest category scores and reinvesting the proceeds in firms with the highest scores, maintaining the same regional and sectoral composition. These approaches reduce the portfolio’s tracking error and slightly improve its risk-adjusted performance, while still yielding large gains in targeted ESG scores.

Suggested Citation

  • Torsten Ehlers & Ulrike Elsenhuber & Anandakumar Jegarasasingam & Eric Jondeau, 2024. "Deconstructing ESG scores: investing at the category score level," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 222-244, May.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:3:d:10.1057_s41260-024-00356-1
    DOI: 10.1057/s41260-024-00356-1
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    References listed on IDEAS

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