The risk of social responsibility – is it systematic?

This paper empirically investigates the risk characteristics of three environmental, social and corporate governance (ESG) rating concepts commonly used for assessing corporate social performance (CSP). Analogous to financial returns, investors are subject to the risk of changes in the average ESG level of their portfolio which is denoted as ESG risk. This is of special interest to private and institutional investors focused on a socially responsible investment strategy. Moreover, a growing number of financial products, such as mutual funds, include sustainability objectives. With a large data set including the scores of three important ESG rating agencies, the paper further examines the convergence of ESG risk among different rating providers. Applying a regression-based approach, the paper provides evidence that ESG ratings are subject to a non-diversifiable risk component. Investors are therefore not able to fully avoid ESG risk by diversification. Furthermore, the three rating concepts are not convergent with respect to ESG risk.