ESG Investing

Assessing Risk through Environmental, Social and Governance Exposures

Topics - ESG Investing Portfolio Risk and Performance

${ numberSection } ${ text }
Assessing Risk through Environmental, Social and Governance Exposures

Journal of Investment Management

Asset owners and allocators are increasingly interested in the Environment, Social, and Governance (ESG) profile of their investments. In this article, we present an empirical investigation of the potential link between ESG exposures of companies and the statistical risk of their equity. We investigate both contemporaneous risk forecasts and what ESG characteristics convey about future risks that are not captured by statistical risk models.

What's Inside?

In this article, we discuss risk and return implications of incorporating ESG considerations in an investment strategy. We focus on the risk side and argue that:

• ESG exposures may be informative about the risks of individual firms. We find clear support for this hypothesis in the data which is robust to a wide variety of controls and various stock universes.

• We also find that ESG scores may help forecast future changes to risk estimates from a traditional risk model. Controlling for the contemporaneous risk model estimates, we show that poor ESG exposures predict increased future statistical risks.

• Our findings are consistent with ESG exposures conveying some information about risk that is not captured by traditional statistical risk models.


Overall, our findings suggest that ESG may have a role in investment portfolios that extends beyond ethical considerations, particularly for investors interested in tilting toward safer stocks. ESG exposures may inform investors about the riskiness of the securities in a way that is complementary to what is captured by traditional statistical risk models.

Published In

Alternative Investment Analyst Review

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.