Are ESG scores relevant for portfolio returns?
To do this, we form equal-weighted long-short portfolios for both the WORLD Index and WLS Index universes. These portfolios are long the companies in the top quintile and short the companies in the bottom quintile of Figures 5a and 6a, respectively. As shown in Figures 7a and 7b, a substantial portion of the long-short portfolios' returns is not 'explained' by exposures to factors such as Industry, Country, Currency or Equity Style (e.g., value, quality).
This unexplained share is termed the 'Selection Effect'. In our back-test, the Selection Effect accounted for 38.3% out of 64.7% of cumulative long-short portfolio returns in the WORLD (High and Average disclosure) universe and 9.3% out of 23.7% of cumulative total returns within the WLS disclosure-filtered universe.
Note that this return attribution is based on monthly down-sampled risk exposures from Bloomberg's PORT MAC3 equity risk model, that are produced at a daily frequency. As a result, the attribution results shown here are approximations and may not exactly match analyses performed in PORT .
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