Purpose This study examines the relationship between environmental, social and governance risk and asset-specific (idiosyncratic) risk for sustainable investment mutual funds and ETFs. Design/methodology/approach Employing data from Sustainalytics, Bloomberg, Yahoo! Finance and the Forum for Sustainable and Responsible Investment (USSIF), this study applies traditional cross-sectional regressions based on sub-sample analysis. This study estimates idiosyncratic risk for the sustainable test assets through the capital asset pricing model (CAPM) and an augmented asset pricing model that includes the risk factors of Fama and French (2015), a momentum factor and a liquidity factor. Findings This study provides evidence in support of the hypotheses that higher levels of unmanaged environmental and governance risks are associated with higher idiosyncratic risk across our test assets. In contrast, higher levels of unmanaged social risk are associated with lower idiosyncratic risk across the sustainable investment test assets. Approximately 20 percent of the cross-sectional variation in idiosyncratic risk among sustainable investment mutual funds and ETFs is collectively explained by unmanaged environmental, social and governance risks. The results are robust to different aggregate risk factors and time periods. Research limitations/implications While recent work has examined the relationship between idiosyncratic risk and investment assets with varying degrees of ESG performance, there has been an absence of research that investigates the relationship between ESG risk and the idiosyncratic risk of sustainable investment mutual funds and ETFs. Practical implications The findings in this study lend support toward including sustainability into information datasets and decision-making processes. This study yields implications for risk assessment and management. Originality/value This study proposes a novel approach towards examining the role of sustainability reporting for investment assets by examining the relationship between E-pillar, S-pillar and G-pillar risk in relation to idiosyncratic risk.
Omid Sabbaghi (Wed,) studied this question.