The Performance of ESG Integration Strategies. Development of an ESG Integration Methodology for EU Equity Portfolios

Abstract or Introduction

This thesis seeks to develop a practical SRI strategy for quantitatively integrating financially material ESG factors into E.U. equity portfolios. Specifically, it investigates if portfolios constructed from companies that invest heavily in their material sustainability factors achieve positive alphas. In this context, financially material information on sustainability factors means data whose concealment or misrepresentation may influence the investment decision.

The thesis also examines whether positive alphas are achieved with portfolios of companies with low investments in their material sustainability factors. In addition, the study investigated how the level of corporate investments in immaterial and overall sustainability factors influence the risk-adjusted portfolio return. Furthermore, a robustness check of the results was based on the data from two sub-periods and one sub-sample.

This study connects Refinitiv ESG and financial data with the Sustainable Accounting Standards Board’s (SASB) ESG financial materiality classification for portfolio construction. The study analyzes European risk-factor and market data from the Kenneth R. French Data Library. To assess the portfolios’ performance for 2004–2019 the Fama-French 3-factor, Carhart 4-factor, and Fama-French 5-factor models are used. In total, 48 ESG integrated portfolios were constructed and analyzed.

Investors in the European Union stock market are increasingly pressured by clients and regulators to consider corporate sustainability factors when making investment decisions. Several studies have shown that sustainable and responsible investment (SRI) strategies offer a solution to this challenge. With SRI, investors can include companies’ sustainability factors via environmental, social, and governance (ESG) information in their decisions and achieve superior excess returns. However, practitioners have criticized the lack of transparency and the quality of standardized ESG information published by ESG rating agencies.