Fooling Actively: Factor Exposure Analysis of Active ESG Managers

Posted: 1 Aug 2019

See all articles by Dr. Rajnish Kumar

Dr. Rajnish Kumar

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: June 9, 2019


The article examines the factor return attribution of active managers with exposure to Environment, Social and Governance (ESG). The analyses have been done using CAPM, Fama- French three factors, Fama-French-Carhart four factors, Fama-French five factors and Fama- French-Carhart six factors asset pricing models since the inception of each of active ESG funds using Fama-French factor library as well as AQR factor library data. We find that returns of most of the active ESG funds are explained by CAPM market factor as adjusted R2 varies from 70% to 98%. The analyses show that only 10% of the active ESG managers are able to generate positive alpha after controlling for all the factors. Further, for all the active ESG funds for which alpha is positive and significant, factors other than market are both negatively and positively associated with ESG funds’ return. This implies that not all active ESG managers are correctly incorporating ESG metric in their portfolio construction. Active ESG managers can generate alpha either by including other performance metric in constructing their ESG portfolio or creating portfolio based on materiality mapped ESG score or incorporating the information available in basic components of ESG which is still not priced in the already established factors.

Keywords: ESG, Fama-French, Factors, CAPM, Asset Pricing, Active Management

JEL Classification: G11, G12, G24, G34

Suggested Citation

Kumar, Rajnish, Fooling Actively: Factor Exposure Analysis of Active ESG Managers (June 9, 2019). Available at SSRN:

Rajnish Kumar (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065

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