For additional information on ESG at AQR, visit aqr.com/esg 

Journal Article

ESG Ratings: A Compass without Direction

We examine the recent concerns about the reliability of the assessments of ESG ratings providers. We review the demand for ESG information, the stated objectives of ESG ratings providers, how ratings are determined, the evidence of what they achieve, and structural aspects of the industry that potentially influence ratings. We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments.

Interview

A Fireside Chat with Cliff Asness and Institutional Investor on ESG Investing

AQR Managing and Founding Principal Cliff Asness sat down with Institutional Investor Editor-in-Chief Michael Corcoran to answer some of the key questions on ESG investing. The conversation covered how a quantitative manager can effectively engage with companies, how investors can use their portfolios to help address climate change, why shorting is an effective ESG tool, and more.

Annual ESG Report 2021

As part of our ongoing commitment to ESG, we are pleased to share our ESG annual report with you. This report reviews our ESG developments and progress in 2021, while outlining our approach, governance structure, and dedicated resources to this increasingly important aspect of investing.

White Paper

Supply Chain Climate Exposure

To manage climate risks, investors need reliable climate exposure metrics, but such risks may be difficult to measure, particularly along the supply chain. Using broadly accessible data, we propose an intuitive metric that quantifies the exposure a company has to customers and suppliers. Our metric is related to scope 3 emissions and captures the strength of economic linkages as well as the overall climate exposure of a firm’s customers and suppliers.

White Paper

Looking Forward With Historical Carbon Data

Increasingly many allocators are interested in computing their portfolio’s carbon footprint. We show that historical emissions data are useful despite a substantial 1-2 years’ lag typically to when investment portfolios are built.

Perspective

Shorting Counts

Man Group recently wrote an op-ed titled “Short-selling does not count as a carbon offset.” Of course we agree it doesn’t. But the headline is quite misleading if taken to mean shorting has no role in the fight to reduce carbon emissions. Shorting does exactly what it’s supposed to do – raise the cost of capital to the emitters, even more so than divestment.

Alternative Thinking

Can Machine Learning Help Manage Climate Risks?

Some investors have incorporated carbon emissions into investment selection as their primary approach to preparing their portfolios for a future regime shift to a lower-carbon economy. However, carbon emissions can be a narrow measure of overall climate risk. To complement this approach, we explore how machine learning techniques may be able create a broad climate hedging portfolio based on stocks’ sensitivity to climate news.

Working Paper

Sustainable Systematic Credit

Interest in sustainable investing is now expanding into fixed income. This paper assesses how measures of sustainability/ESG might be relevant for corporate bonds and analyzes how ESG measures can be incorporated into an investment process to achieve the joint object of maximizing risk-adjusted returns and a sustainability target.

Perspective

Shorting Your Way to a Greener Tomorrow

It would be an understatement to say there is confusion in the industry about the use of shorting in an ESG context. When it comes to calculating a portfolio’s ESG score, we have heard arguments ranging from "ignore the shorts” to “net them against longs,” and, my favorite as it’s creatively insane, “pretend the shorts are actually longs.” This note explains why it is critical that shorts be properly accounted for, so that investors can use shorting to reduce carbon exposure, to get to net zero or to achieve other ESG goals.

Annual ESG Report 2020

As part of our ongoing commitment to ESG, we are pleased to share our ESG annual report with you. This report reviews our ESG developments and progress in 2020, while outlining our approach, governance structure, and dedicated resources to this increasingly important aspect of investing.