Integrating ESG into Factor Pricing Models and Actuarial Risk Estimation: Implications for Venture Capital

Abstract

This paper reviews how Environmental, Social and Governance (ESG) factors can be incorporated into factor pricing models and actuarial risk estimation methods, and evaluates their implications for venture capital (VC) investment. Traditional asset pricing models, including single-factor and multi-factor models, provide a framework for assessing systematic risk, while actuarial techniques such as Value at Risk (VaR), Conditional Value at Risk (CVaR), and Extreme Value Theory (EVT) are effective in measuring tail risk. Existing literature suggests that ESG performance influences both expected returns and downside risk, with firms exhibiting stronger ESG profiles generally showing lower tail risk and greater resilience during periods of financial stress. In the context of venture capital, ESG serves as a signal of management quality, governance capability, and long-term growth potential, helping investors mitigate information asymmetry and improve investment selection. This review identifies major research findings, ongoing debates, and current gaps, particularly the lack of an integrated framework combining factor pricing and actuarial methods for ESG analysis in private markets. The paper concludes by proposing future research directions for building quantitative ESG assessment tools tailored to venture capital.