Abstract:
In the following study, we examine the discrepancies and performances' opportunities that arise when we include Environmental, Social and Governance (ESG) ratings into portfolios. The analysis introduces the portfolios' composition based on the firms' environmental pillar scores and on the Climate Policy Relevant Sectors (CPRS). We conduct an empirical study, consisting in portfolios’ performance evaluation through different approaches, which aims to investigate whether the implementation of environmental scores of different ESG rating agencies may lead to different/opposite results and whether it may have implications on portfolio’s performances.
Our findings show that the discrepancy among rating agencies about ESG ratings is significant and this affects portfolios’ performances. Nevertheless, when the component of disagreement is removed, the results suggest that ‘high environmental-scores’ portfolio underperforms ‘low environmental-scores’ portfolio. Indeed, through the multi-factor models we observe that if we assume a long position on ‘high’ portfolio and a short position on the ‘low’ portfolio, the ESG effect generate negative alphas. As the time horizon is extended from the short to the long-term, alphas become less negative.
