Does sustainability pay off? A multi-factor analysis on regional DJSI and renewable stock indices

Iskra Sokolovska,Aleksandar Kešeljević

doi:10.1080/1331677x.2018.1550002

Iskra Sokolovska, Aleksandar Kešeljević

Open Access

https://doi.org/10.1080/1331677x.2018.1550002

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Abstract

The private sector arguably plays a greater role in sustainability transitions through private investment. The authors apply the four- and five-factor Fama-French models to the Dow Jones Sustainability Index (DJSI) and a range of renewable energy indices to evaluate the financial attractiveness of sustainability in general, relative to alternative investments. They find both overperformance and underperformance in the regional DJSIs over the period 2006–2016. In contrast, renewable energy indices have high betas and negative alphas, which makes them financially unattractive. These results imply the need for public support in sustainability transitions, as high risk and low return deter private investment.

Highlights

Renewable energy and socially responsible investing are becoming increasingly important
We extend the Capital Asset Pricing Model (CAPM) model to a multi-factor model and apply it to the Dow Jones Sustainability Index (DJSI) by regions (Europe, Asia, the United States and the global index), as well as the indices on renewable energy
The results indicate substantial risk that differs across regions

Summary

Introduction

Renewable energy and socially responsible investing are becoming increasingly important. The topic is becoming progressively more relevant for investors, due to the policy measures announced to green the economy, sustainable investment principles are not binding for investors This has contributed to greater interest in the link between environmental and financial performance. Responsible and renewable energy indices should be assessed separately, since the latter may be exposed to more risk due to the nature of the sector. This is relevant from both financial investors’ and policy makers’ perspectives, as negative financial performance implies a greater role for the public sector in the greening of the economy

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Conclusion