Does ESG Investments Come at a Cost?

Abstract

This thesis investigates the financial market’s reaction to the implementation of ESG related investment methods. In order to investigate this, we estimated the riskadjusted performance, evaluated and compared a high-rated ESG (i.e. Virtue) portfolio with a low-rated ESG portfolio (i.e. Sin) and a portfolio based on sin industries defined by Hong and Kacperczyk (2009) (i.e. SinHK). We find that there is mixed evidence on whether sustainable investing implies financial cost. Moreover, by implementing an investment strategy based on ESG rating might results in a tilt on size, where we also discovered a positive correlation between ESG and Size. Furthermore, we find evidence supporting Hong and Kacperczyk (2009) hypothesis, however, we do not find that there is any statistical significant outperformance of any of the portfolios in regards to abnormal returns.