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Chasing the ESG factor
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DOI：10.1016/j.jbankfin.2022.106498.png)
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Abstract
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We analytically compare two dominant methodologies for the construction of an ESG factor: the time series (ratings used to sort stocks) and cross-sectional (ratings used to weight stocks) approaches. Differences in ESG rating and exposure to other firm characteristics imply an ex ante expected return spread between the two factors. We construct a cross-sectional factor (i) featuring a targeted rating, thus allowing comparability with other factors, (ii) neutralizing exposure to other firm characteristics, and (iii) not harming diversification through stock screening. Using ratings from several data vendors, we document strong variations of the factor alpha in the time series and across vendors. The conditional alpha is negatively related to the level of media attention for ESG and positively related to variations in media attention.(c) 2022 Elsevier B.V. All rights reserved.
Keywords:
ESG
Factor investing
Cross-sectional asset pricing
Media attention
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ECOLOGICAL ECONOMICS
ECOLOGICAL ECONOMICSIF6.3
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