Environmental, social, and governance (ESG) considerations have become crucial in the investment landscape, as sustainable practices and responsible corporate behavior increasingly influence financial performance. Despite this growing importance, there is a lack of comprehensive models that integrate and attribute ESG performance, such as CO2 emissions, leaving a gap in understanding the impact of investment decisions on ESG outcomes.
This article describes the development of an ESG attribution model. The model quantifies the influence of investment decisions on ESG factors and seeks to close the feedback loop in the investment decisionmaking process by combining ESG data with traditional financial metrics, enabling a holistic analysis of both financial and nonfinancial outcomes.
The methodology involves expanding the BrinsonFachler method (Brinson & Fachler, 1985) and the Investment Decision Process (IDP) model (Geenen et al., 2021) to include non financial elements such as carbon emissions and ESG scores. Case studies demonstrate the model’s practical application, highlighting its potential to enhance investment decisionmaking and promote sustainable investing practices.
The main takeaway is that incorporating ESG factors into the investment decisionmaking process is essential for aligning investments with broader societal goals and improve decision making.
in VBA Journaal door Robbert Lammers, Sam Radford and Vincent Verkerk