Passive ESG Portfolio Management—The Benchmark Strategy for Socially Responsible Investors

Julian Amon,Margarethe Rammerstorfer,Karl Weinmayer

doi:10.3390/su13169388

Julian Amon, Margarethe Rammerstorfer + Show 1 more

Open Access

https://doi.org/10.3390/su13169388

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Abstract

In this article, we investigate the notion of doing well while doing good from the perspective of passive portfolio strategies. We analyze a number of asset allocation strategies based on ESG-weighting and compare their financial and ESG performance for the US and Europe. We find no significant difference in the financial performance but superior ESG performance of ESG-based strategies. It can be concluded that, compared to a naive strategy, socially responsible investors are willing to pay a small premium for the impact of the portfolio via transaction costs when rebalancing the portfolio according to their preferences for social responsibility. In addition, when comparing the ESG-based strategies to a value-weighted strategy, we observe no significant difference in ESG performance but a high degree of significance in the superior financial performance of the ESG-based strategy. We also analyze the strategies with regards to the factor loadings given by the Fama–French five-factor model and a sixth factor denoted GMB (Good minus Bad) and find significant differences across the regions and strategies. Overall, the results show strong support of ESG-based strategies being preferred by socially responsible investors but also suggest that such strategies might be preferred by conventional investors looking for a passively managed alternative compared to a value-weighted index. Furthermore, it seems that such a strategy might be a more adequate benchmark for active SRI funds.

Highlights

For many decades firms have been operating with a traditional economic viewpoint, which advocates the control of firms by profit-maximizing shareholders in pursuit of selfinterest and efficiency
We propose a simple asset allocation strategy using a portfolio weighting based on ESG scores as social responsibility measure in which the socially responsible investors’ preference can be directly expressed instead of, or in addition to, screening activities
We extend the literature on socially responsible investments (SRI) portfolio management by investigating passively managed strategies for socially responsible investors which can be executed with no expectations or expert knowledge required

Summary

Introduction

For many decades firms have been operating with a traditional economic viewpoint, which advocates the control of firms by profit-maximizing shareholders in pursuit of selfinterest and efficiency. Over the years, voices assigning the role of social responsibility to firms have become louder and an increasing number of firms have been adopting policies aimed at managing their environmental, social and governance impact (ESG), while investors have started to incorporate social responsibility criteria into their investment decisions. This development is documented by the strong increase in the investment volume of socially responsible investments (SRI).

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