The relationship between ESG criteria and investors has changed significantly in recent years. Beyond the compliance and regulatory framework, the analysis of environmental, social and governance criteria is now relevant at all stages of management: from portfolio construction, through impact assessment, reporting and performance analysis. The speed of these changes is an obstacle as well as an opportunity for quantitative management, where data access and reliability are key challenges.

We are convinced that the ESG dimension has not only materially impacted the valuation of companies, but also their systematic and idiosyncratic risk profiles. But aside from the economic reality of these impacts, statistical stability and the identification of the ESG risk factor are crucial in the context of portfolio management.

In this analysis, which will be presented in three parts, we discuss several issues that are central to the integration of ESG criteria within equity management.

In this first part, we will start by examining data heterogeneity and relevance.

To go further, read the part 2 on the existence of an ESG risk factor

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  • The proliferation of data sources and the growing importance of corporate transparency has created a favourable environment for the integration of ESG criteria into quantitative management.
  • This proliferation of the available information comes with far from negligible heterogeneity between ratings produced by the different providers.
  • The combination of multiple sources provides an alternative route through data heterogeneity, thus helping to extract a common ESG information and then explore the existence of a ESG risk factor in the market.
Written in March 2022

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

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