Financial Innovation· 2026Q1
Applying explainable AI to analyze size-sorted ESG portfolios
- 0citations
- Q1SCImago
- 2026year
Short summary
Explainable AI reveals that large-cap and mid-cap ESG portfolios are most influenced by their respective base indices and the broader stock market, while small-cap ESG portfolios show higher sensitivity to credit market conditions and default spreads.
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Key points
- XAI analysis shows size-sorted ESG portfolios are most connected to companies of similar sizes.
- Large and mid-cap ESG portfolios interact primarily with their base indices and the aggregate stock market.
- Small-cap ESG portfolios show significant interaction with the bond market and default spread.
- These interactions for small-cap ESG portfolios reflect sensitivity to credit market conditions and default dynamics.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract This research utilizes explainable artificial intelligence (XAI) techniques to explore the relationship between size-sorted environmental, social, and governance (ESG) portfolio indices (large-cap, mid-cap, and small-cap ESG portfolios) and their corresponding base indices (large-cap, mid-cap, and small-cap portfolios) in the US stock market. Additionally, the study accounts for key market factors, risks, and uncertainties. The findings reveal several important insights. First, size-sorted ESG portfolios are most significantly connected with portfolios containing companies of similar sizes. Second, for large-cap and mid-cap ESG portfolios, after accounting for interaction effects, their base indices (large-cap and mid-cap portfolios) primarily interact with other base indices. This observation suggests that the performance of large-cap and mid-cap ESG portfolios is more closely tied to the overall performance of the aggregate stock market. Third, for the small-cap ESG portfolio, the corresponding small-cap index (small-cap portfolio) frequently interacts with the bond market and default spread. Rather than indicating identical “default risk profiles,” these interactions reflect a stronger sensitivity of small-cap ESG portfolios to credit-market conditions and default-related dynamics, consistent with theoretical arguments regarding the default-risk exposure of small firms.
The authors' abstract, as published at the source. Financial Innovation, 2026 · DOI ↗
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