Performance of the ESG Momentum Strategy
Bergskaug, Eemeli (2019-12-17)
Bergskaug, Eemeli
17.12.2019
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2019121748628
https://urn.fi/URN:NBN:fi-fe2019121748628
Tiivistelmä
The popularity of socially responsible investing has been growing rapidly during the past decades and the discipline has gained a firm foothold within the financial industry. Emerging demand for information about how companies incorporate social responsibility in their operations has been responded by specialized agencies providing an extensive amount of information of companies’ corporate social responsibility profiles. The financial performance of portfolios investing in companies that are ranked based on the three dimensions of sustainability has been studied profoundly. As many studies show that a correlation exists between high ESG rating and financial performance (Gunnar et al. 2019), investors are constantly emerging new strategies to take advantage of this. The ESG momentum strategy is one of the recently developed strategies showing promising results, yet it is still to be found by the greater public. This thesis contributes for that by studying the performance of ESG momentum portfolios in developed and emerging markets over the sample period from 2010 to 2018. Additionally, the positive and negative trend in the change of the ESG rating of a company are studied separately to perceive whether one is superior to the other.
Using ESG ratings and financial data provided by Refinitiv, six different portfolios are constructed from companies included in US and BRICS. The financial performance of these portfolios is then studied by applying CAPM single-factor model, Fama-French 3factor and 5-factor models and Carhart 4-factor model with the factor data obtained from Kenneth R. French database. This thesis approaches the portfolio construction in a more practical level by restricting the amount of companies in the portfolios to top 10% and bottom 10% based on the change of the ESG rating during the past fiscal year.
The findings of this thesis are not aligned with the previous studies. Empirical analysis show that the ESG momentum portfolios do not gain statistically significant alpha in either of the investment universes over the sample period. The contradiction in the findings is supposedly due to the different approach to portfolio construction and more restricted investment universe. A possible bias also arises from the lack of standardization and regulation between the ESG ratings from different agencies. However, the results of the separate portfolios for the positive and negative change in the ESG rating motivate to combine the ESG momentum based screening with other SRI strategies in future research.
Using ESG ratings and financial data provided by Refinitiv, six different portfolios are constructed from companies included in US and BRICS. The financial performance of these portfolios is then studied by applying CAPM single-factor model, Fama-French 3factor and 5-factor models and Carhart 4-factor model with the factor data obtained from Kenneth R. French database. This thesis approaches the portfolio construction in a more practical level by restricting the amount of companies in the portfolios to top 10% and bottom 10% based on the change of the ESG rating during the past fiscal year.
The findings of this thesis are not aligned with the previous studies. Empirical analysis show that the ESG momentum portfolios do not gain statistically significant alpha in either of the investment universes over the sample period. The contradiction in the findings is supposedly due to the different approach to portfolio construction and more restricted investment universe. A possible bias also arises from the lack of standardization and regulation between the ESG ratings from different agencies. However, the results of the separate portfolios for the positive and negative change in the ESG rating motivate to combine the ESG momentum based screening with other SRI strategies in future research.