Abstract
ESG factors are becoming mainstream in portfolio investment strategies, attracting increasing fund inflows from investors who are aligning their investment values to Sustainable Development Goals (SDG) declared by the United Nations Principles for Responsible Investments. Do investors sacrifice return for pursuing ESG-aligned megatrend goals? The study analyses the risk-adjusted financial performance of ESG-themed megatrend investment strategies in global equity markets. The analysis covers nine themes for the period 2015–2019: environmental megatrends covering energy efficiency, food security, and water scarcity; social megatrends covering ageing, millennials, and urbanisation; governance megatrends covered by cybersecurity, disruptive technologies, and robotics. We construct megatrend factor portfolios based on signalling theory and formulate a novel measure for stock megatrend exposure (MTE), based on the relative fund flows into the corresponding thematic ETFs. We apply pure factor portfolios methodology based on constrained WLS cross-sectional regressions to calculate Fama-French factor returns. Time-series regression rests on the generalised method of moments estimator (GMM) that uses robust distance instruments. Our findings show that each environmental megatrend, as well as the disruptive technologies megatrend, yielded positive and significant alphas relative to the passive strategy, although this outperformance becomes statistically insignificant in the Fama-French 5-factor model context. The important result is that most of the megatrend factor portfolios yielded significant non-negative alphas; which supports our assumption that megatrend investing strategy promotes SDGs while not sacrificing returns, even when accounting for transaction costs up to 50bps/annum. Higher transaction costs, as is the case for some of these ETFs with expense ratios reaching 80-100bps, may be an indication of two things: ESG-themed megatrend investors were willing to sacrifice ca. 30-50bps of annual return to remain aligned with sustainability targets, or that expense ratio may well decline in the future.
Highlights
Sustainable investing has become an attractive strategy both for investors and policymakers all around the world
Our research addresses the question if investing in ESG-themed megatrend equity factor portfolios could generate significant positive risk-adjusted returns
We found that the F statistics indicate measurement errors in the case of five megatrends, including food security, ageing, and each technological governance megatrend. (The Hausman artificial regression tests can be found in S6 Appendix in S2 File along with relevance and exogeneity tests of the IVs)
Summary
Sustainable investing has become an attractive strategy both for investors and policymakers all around the world. According to the Global Sustainable Investment Alliance’s 2018 report, sustainable investing reached $30.7 trillion at the start of 2018, a 34 per cent increase in two years. The proportion of sustainable investments relative to total managed assets made up 33 per cent in 2018 while it was 21 per cent in 2012, which corresponds to an almost 60 per cent increase in six years [1]. Some of the goals are as follows: end hunger, achieve food security (SDG2), ensure healthy lives and promote wellbeing for all at all ages (SDG3), make cities and human settlements inclusive, safe, resilient and sustainable (SDG11)
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