The relationship between ESG ratings, investment factors, and credit ratings

• Autor(a) principal: Capucho, Samuel Machado
• Data de Publicação: 2022
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/26492
• topic: ESG ratings; Credit ratings; Factor investing; Responsible investment; Asset allocation; Ratings ESG; Ratings de crédito; Investimento por fatores; Investimento responsável; Alocação de ativos

Responsible investing, the investment approach that considers Environmental, Social, and Governance (ESG) criteria, has been gaining relevance in the financial markets. Consequently, ESG rating agencies have become key players in the field of responsible investment. As ESG and factor investing are becoming more important to the asset management industry, we investigate the relationship that investment factors and credit ratings may have with ESG ratings overall, and individual pillars. The dataset includes ESG ratings from Sustainalytics and Refinitiv Eikon, investment factors from Morningstar, and credit ratings from Thomson Reuters. We use a sample of 825 publicly-listed firms in the U.S. at the end of 2021. To examine the relationship, we conduct a descriptive and regression analysis. The descriptive analysis includes analysis of the general descriptive statistics, correlation matrix, and scatter plots. We also include a sectorial analysis of firms to see which sectors have, on average, better or worse ESG ratings. Finally, we split our sample taking into account the 25% worst and best companies in terms of ESG ratings in order to draw more sample-specific conclusions. In the regression analysis, in order to analyse the relationship of our variables, we conduct eight robust regressions involving the Newey-West method. Our findings suggest that an asset manager, by investing in companies according to certain investment factors, or sectors, or with higher credit ratings, may be adding alpha while having a portfolio positively aligned with better ESG ratings. The results are more conclusive according to the Refinitiv Eikon ESG Rating.