Sustainable investing has grown into a major force in global markets, with trillions of dollars now managed under Environmental, Social, Governance (ESG) mandates. But as it's scaled up, so has its scrutiny. ESG ratings compress hundreds of factors into a single score, yet providers often reach very different conclusions about the same company, reflecting disclosure levels as much as actual sustainability performance. This inconsistency has blurred the evidence linking ESG to financial returns, a doubt reinforced by a wave of anti-ESG legislation in the U.S.
The current uncertainty poses a real challenge for investors, practitioners, and policymakers trying to make informed decisions. This is why Professor Fabio Moneta has been awarded a Telfer SMRG Research Development Grant for his project titled "The Value of Environmental, Social, and Governance (ESG) Data for Mutual Funds."
The project asks three questions: do ESG variables sharpen return forecasts beyond standard predictors; if so, how much value does that add to a portfolio (e.g., via the Sharpe ratio); and what drives any edge such as returns, risk reduction, or a specific ESG pillar?
Professor Moneta will approach this from a real-time investor's perspective, combining machine learning with asset pricing and econometric tools. Machine learning will surface nonlinear patterns linking ESG data, fundamentals, and returns; portfolio testing will translate any predictive power into real investment value; and data valuation methods will put a direct figure on what ESG information is worth. Rolling estimation windows will mimic how an investor's knowledge builds over time.
The findings will serve three audiences: practitioners deciding which ESG metrics are worth integrating, regulators weighing the case for standardized disclosure amid growing ESG backlash, and academics extending machine learning and asset pricing methods into the ESG space.
Ultimately, Professor Moneta's research aims to answer a question that remains contested: does ESG data genuinely improve financial outcomes, or does its case rest on non-financial grounds? Clarifying this will help investors, regulators, and educators separate ESG's real value from its potential.
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