ESG Portfolio Research Articles

Is ESG an Equity Factor or Just an Investment Guide?

Environmental, social, and governance (ESG) information demands attention within the asset management industry since it has become widely accepted that making an allowance for ESG criteria within an equity portfolio enhances returns. The authors test this proposition by incorporating ESG criteria into a worldwide market neutral portfolio using an “off-the-shelf” third-party database of individual security ratings. Our results show that incorporating ESG information into a worldwide equity-market-neutral portfolio yields no additional return because any benefits from tilting toward a better-rated ESG portfolio is already wholly captured by other well-known equity factors. Doing so, however, does not hurt returns. They conclude that ESG should not be considered as a unique equity factor.

ESG Factor Investing: Myth or Reality ?

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.

The wages of social responsibility — where are they? A critical review of ESG investing

This paper contributes both to investigating the link between the corporate social and financial performance based on environmental, social and corporate governance (ESG) ratings and to reviewing the existing empirical evidence pertaining to this relationship. The sample used includes ESG data of ASSET4, Bloomberg and KLD for the U.S. market from 1991 to 2012. The econometrical framework applies an ESG portfolio approach using the Carhart (1997) four-factor model as well as cross-sectional Fama and MacBeth (1973) regressions. Previous empirical research indicates a relationship between ESG ratings and returns. As against this, the ESG portfolios do not state a significant return difference between companies with high and low ESG ratings. Although the Fama and MacBeth (1973) regressions reveal a significant influence of several ESG variables, investors are hardly able to exploit this relationship. The magnitude and direction of the impact are substantially dependent on the rating provider, the company sample and the particular subperiod. The results suggest that investors should no longer expect abnormal returns by trading a difference portfolio of high and low rated firms with regard to ESG aspects.

Possible environmental hazards of gas cooking

Environmental, social, and governance (ESG) ETFs attract investors who are driven by their personal values in investing, but also by investors who believe that ESG investing will produce a favorable return–risk tradeoff. This article looks at the risk and return characteristics of ESG ETFs since their inception (February 2005) through July 2019 and compares them with investable proxies for US (Russell 3000 ETF—IWV) and global (SPDR^® Global Dow ETF—DGT) equity markets. Using absolute and risk-adjusted performance measures, the author finds that equal- and value-weighted ESG portfolios outperformed the IWV and DGT in some periods and underperformed in others. However, during the entire period, IWV and DGT outperformed ESG portfolios and had higher absolute- and risk-adjusted performance. <b>TOPICS:</b>Exchange-traded funds and applications, ESG investing <b>Key Findings</b> • Environmental, social, and governance (ESG) ETFs attract investors who are driven by their personal values in investing, but also by investors who believe that ESG investing will produce a favorable return–risk tradeoff. • This article looks at the risk and return characteristics of ESG ETFs since their inception (February 2005) through July 2019 and compares them with the US (Russell 3000 ETF—IWV) and global (SPDR^® Global Dow ETF—DGT) equity markets. • The period of study is divided into two bull markets (February 2005 to September 2007 and April 2009 to July 2019) and one bear market (October 2007 to March 2009). ESG portfolios outperformed IWV and DGT in some periods and underperformed in others. However, during the entire period, both IWV and DGT outperformed ESG portfolios, with higher absolute- and risk-adjusted performance. • Results indicate that investors can definitely allocate a portion of their portfolios toward their desired ESG investment as it would help them diversify and lower risk.