Environmentally (Un-)Friendly Portfolio Construction

Abstract

This study sheds light on a new type of sustainable investment approach, namely environmental, social, and governance (ESG) momentum. We provide both a theoretical discussion and an empirical comparison of this new approach and put it in perspective to traditional weighting schemes considered by sustainable portfolio managers. In order to provide a clear basis for our argumentation and avoid any conflicting effects, we solely focus on the environmental aspect of ESG ratings in Europe and pay particular attention to strategies’ carbon footprint as a central measure of a portfolio’s environmental friendliness. Although the empirical results demonstrate inferior environmental ratings for ESG-momentum portfolios and mixed results in respect to risk-adjusted returns across alternative rating components, there might still be a case for investing in sustainable momentum stocks.

Keywords: ESG, sustainable investing, ESG momentum

JEL Classification: G10, G11