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Annual ESG Report 2023

Working Paper

In Search of the True Greenium

The greenium (the expected return of green securities relative to brown) is a central impact measure for ESG investors. We propose a robust green score combined with forward-looking expected returns, yielding a more precisely estimated annual equity greenium.

Working Paper

Carbon Pricing versus Green Finance

We show that green finance should not be used if the carbon price equals its social cost. However, with too low carbon prices, green finance can implement the social optimum if the cost of capital can be controlled and there are no stranded assets. We show explicitly how to "translate" a carbon tax into green finance terms, highlight how green finance should depend on scope 1, 2, and 3 emissions, present its limitations, and illustrate the predictions empirically.

Annual ESG Report 2022

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 2022, while outlining our approach, governance structure, and dedicated resources to this increasingly important aspect of investing.

White Paper

How Portfolios Can Impact the Real Economy

To help clarify how investors seeking impact through their financial portfolios can affect the direction of corporate decision making, we analyze the two channels of influence – direct control and changing the cost of capital. We argue that there are no other first-order mechanisms for a financial portfolio to have “impact” beyond these. As a real-world example, we apply these insights to the portfolio “net zero” initiative.

Working Paper

Is Capital Structure Irrelevant with ESG Investors?

We examine whether capital structure is irrelevant for enterprise value and investment when investors care about ESG issues, which we denote “ESG-Modigliani-Miller” (ESG-MM). Theoretically, we show that ESG-MM holds if ESG is additive and markets are perfect. Empirically, we provide evidence of failure of ESG-MM, implying that firms and governments can exploit non-additive ESG or segmented markets.

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.


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.

Journal Article

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.