ESG risk is the name of Etica Sgr’s proprietary risk metric designed by Paolo Capelli, Head of Risk Management.
ESG Risk sets out to calculate the risk deriving from factors ascribable to the Environmental, Social and Governance problems that impact the performance.
Why calculate investment risk?
One of the key goals of investment is undoubtedly to produce returns. However there is no return without risk. That is why it is vital to monitor the risk variables that might have an adverse impact on investment performance. A couple of examples are interest rate risk and foreign exchange risk.
Recent history has shown us that risk – and therefore potential loss of performance – can derive from factors ascribable to environmental, social and governance (ESG) issues. And yet, until a short while ago, there were no satisfactory ways to measure this.
ESG risk, an Etica Sgr innovation
Etica Sgr has remedied this problem. Our risk manager has realized a proprietary statistical and predictive metric to estimate ESG risk.
How does it work? Each security in the portfolio is assigned an ESG score which is higher for the securities of virtuous firms and countries, and lower for those least attentive to these issues. This enables us to organize the securities into ESG risk classes. This distribution reveals that ESG risk is lower the more the securities attentive to environmental, social and governance questions are concentrated in the higher scoring classes.
Why the new method is valuable
Etica Sgr’s ESG risk metric opens the way to the introduction of an innovative and rigorous approach, partly thanks to the demonstration of a strong statistical correlation with traditional financial portfolio risk (undiversified VaR).
Finally we can say that an investment approach that also takes into consideration extra-financial issues delivers long-term rewards.
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