Sustainable Factor Investing: Where Doing Well Meets Doing Good

47 Pages Posted: 18 Apr 2019 Last revised: 15 Jun 2019

See all articles by John Hua Fan

John Hua Fan

Griffith University - Department of Accounting, Finance and Economics

Lachlan Michalski

Griffith University - Department of Accounting, Finance and Economics

Date Written: June 14, 2019

Abstract

This paper investigates the impact of ESG integration on systematic factors in Australia. Whilst negative screening leads to inferior performance, simultaneously exploiting ESG scores with quality, momentum and size characteristics outperforms standard factor strategies. The outperformance is more pronounced during periods of slow growth, high inflation, credit-spread and market volatility. Furthermore, integrating E, S or G ratings individually only leads to improved risk-adjusted performance in quality and momentum strategies. Finally, we find that forcing portfolio diversification across sectors leads to inferior factor performance. Since ESG integration increases portfolio tilts to higher scoring industries, managers should clearly communicate the opportunity costs arising from mandated sector diversification. Overall, our findings suggest that sustainable factor investing not only allows asset-owners to include their ethical preferences while offering strong potential for wealth generation, but also provides asset managers with the opportunity to mitigate risk.

Keywords: Environment, Social, Governance, Size, Value, Momentum, Quality, MinVolatility

JEL Classification: G11, G30, Q56

Suggested Citation

Fan, John Hua and Michalski, Lachlan, Sustainable Factor Investing: Where Doing Well Meets Doing Good (June 14, 2019). Available at SSRN: https://ssrn.com/abstract=3361445 or http://dx.doi.org/10.2139/ssrn.3361445

John Hua Fan (Contact Author)

Griffith University - Department of Accounting, Finance and Economics ( email )

Brisbane, Queensland 4111
Australia
+61 (0)7 3735 3948 (Phone)
+61 (0)7 373 57760 (Fax)

Lachlan Michalski

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

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