Abstract
ABSTRACT The present study addresses three questions: 1. Whether ESG is the succeeding risk factor? 2. To study the relevance of each component of ESG in investment decision? 3. To develop a new more robust asset pricing model with ESG. This study finds that three-factor models with market, size and ESG factors perform better than the Fama–French three-factor model. Higher Sharpe ratios for ESG, environment, social and governance factors indicate that portfolios formed on these factors show better investment performance over traditional size and value-based portfolios for all cases. The main message of the study is that ESG, environment, social and governance factors play an important role in predicting returns hence they should not be ignored while considering investment decision.
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