Can investment strategies with ESG integration explain enhanced financial performance?

Abstract

There has been a remarkable growth in the alternative investment segment “responsible investing”. Responsible investing can sometimes be described by the acronym ESG, Environmental, Social, and Governance. In spite of the humongous amounts of money invested, research on ESG is still in the nascent stages, currently with equivocal results. This thesis' objective is to utilize traditional asset pricing models to uncover the effect of ESG integration on financial performance. Our results in regards to the risk-adjusted return are statistically weak. We find, however, that ESG is inherently multi-factor, meaning that using ESG scores as investment criteria result in a tilt on style and industry.