Integrated reporting provides a more holistic representation of a firm’s activities, combining key financial and non-financial information, including environmental and social details. Better still, research by Gaia Melloni and her colleagues reveals that firms producing concise and easy to understand reports, in line with international guidelines, may benefit economically in terms of market value and liquidity, compared with those that do not. But with some important caveats.
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.