Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance

Guido Giese, Linda-Eling Lee, Dimitris Melas, Zoltán Nagy, Laura Nishikawa

2019 | Practitioner | ESG Ratings, Portfolio Construction, Risk & Performance, Valuation

By creating transmission channels, we have shown how ESG has affected the valuation and performance of companies, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk). Thus, the transmission from ESG characteristics to financial value is a multichannel process, as opposed to factor investing in which the transmission mechanism is typically simpler and one dimensional.