Using environmental, social, and governance (ESG) scores of firms belonging to the MSCI World universe, we measure the impact of score-based exclusion on both passive investment and smart beta strategies. We find that exclusion leads to improved scores of otherwise standard portfolios without deterioration of their risk-adjusted performance. Smart beta strategies exhibit a similar pattern, often in a more pronounced way. Moreover, our results demonstrate that exclusion also implies regional and sectoral tilts as well as (possibly undesirable) risk exposures of the portfolios.
How secure are Europe’s financial institutions? What are the chances of another crisis? Eric Jondeau and Michael Rockinger create a model for assessing the ability of European financial institutions, industry sectors, and countries, to withstand market shocks.