Determinants of Portfolio ESG Performance: An Attribution Framework

Abstract

In this article, the author develops a parsimonious attribution framework for evaluating the environmental, social, and governance (ESG) performance of a portfolio. The attribution model decomposes portfolio ESG performance into three principal components: a value effect, a weighting effect, and an interaction effect. The author illustrates his approach using the equity portfolios of US public pension funds over time and finds that US public pensions’ positive ESG performance over the past decade is mainly due to their underlying holdings boosting their ESG scores over this period. By contrast, pension portfolio weight changes in high and low ESG-scoring firms over this period contributed negatively to their ESG performance, both in absolute terms and relative to the market portfolio. Furthermore, public pensions’ portfolio weighting behavior (the weighting effect) explains most of the variation in their ESG performance. The findings suggest that the proposed ESG attribution framework can help meet the demand for transparency regarding the ESG performance of investment assets.