Is ESG an Equity Factor or Just an Investment Guide?

Abstract

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.

TOPICS: ESG investing, portfolio theory, portfolio construction