Abstract
When treated as a characteristic, there seems to be an ESG anomaly. A real time investor is better off when augmenting an otherwise standard investment universe with two ESG portfolios of irresponsible and responsible firms. Out of sample, the optimal portfolio including the ESG portfolios outperforms one ignoring them. This added value shows up in the last decade and ESG Factor is a nascent anomaly which became a reality after the Great Financial Crisis. To harvest the ESG premium, the investor goes long irresponsible firms and short responsible ones. In sample evidence based on a long sample fails to show any potential gain from ESG investing. Moreover, long only investors with or without portfolio concentration constraints cannot harvest the ESG premium. Small stocks magnify the potential gains from ESG Factor investing although big stocks already deliver a respectable ESG diversification gain.
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