Can ESG Add Alpha? An Analysis of ESG Tilt and Momentum Strategies

Abstract

Do institutional investors sacrifice risk-adjusted returns by incorporating environmental, social, and corporate governance (ESG) considerations? The authors analyze two relatively hightracking-error global strategies constructed using ESG data—a tilt strategy and a momentum strategy and find that both model portfolios outperformed the MSCI World Index over the past eight years, while also improving the ESG profile of the portfolios. These backtested model portfolios provide an example of how institutional investors with the tolerance to take some active risk, while at the same time looking to improve the ESG profile of their portfolios on a systematic basis, can incorporate such strategies in their investment processes.

TOPICS: ESG investing, analysis of individual factors/risk premia