ESG Factors & Risk-Adjusted Performance: A New Quantitative Model N. C. Ashwin Kumar, Camille Smith, Leïla Badis, Nan Wang, Paz Ambrosy & Rodrigo Tavares Published 4 Oct 2016, Journal of Sustainable Finance & Investment ISSN: 2043-0795 (Print) 2043-0809 (Online) Journal homepage: hYp://www.tandfonline.com/loi/tsfi20 1
The ESG Risk-Premium Model It is common sense: You’re LESS VULNERABLE in the long run if you do the right things. • Most Basic Financial Equation: Risk & Return • Are ESG and Risk Related? There is ‘hidden’ value in ESG if risk reduction is uncovered • Evidence Based • Geographically Global � � Reference companies Inputs � � � � 809 companies to bring Public companies/ statistic significance market based “ESG Industry matters Risk & Volatility Risk � � Materiality varies by industry; Equity investments Premium” industry portfolios built Sustainability Index Data processing � � 157 Dow Jones Matlab Sustainability Index 2
ESG Methodology: Process ❞ www.slideproject.com 3
The Model: Constraints Time & Track record Information system Proprietary information Index Inclusion Bias 4
Results: Annualized Volatility 5
Results: Annualized Return 6
Results: Sharpe & Treynor Ratios 7
Conclusion ESG Factors ESG factors do impact the vola^lity of a stock return Volatility by Different industries are affected differently by ESG prac^ces Industry For all industries studied, companies with good ESG prac^ces show Risk lower risk than reference companies of the same industry The difference in vola^lity for ESG and non-ESG represents a higher Risk-Adjusted risk-adjusted return and should be integrated into investment analysis Performance 8 8
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