Sustainable Investment - Exploring the Linkage between Alpha, ESG, and SDG's
34 Pages Posted: 11 Jun 2020 Last revised: 12 Oct 2020
Date Written: August 2020
Environmental, Social and Governance (ESG) investing has been one of the most important topics in asset management this past decade. Yet, for all the attention, only a fraction of asset managers truly consider ESG issues when making investment decisions. This is partly due to the perceived conflict of ESG investing with an asset manager’s fiduciary duty and partly due to low-quality ESG data despite the near ubiquity of sustainability reports. We analyze the relationship between alpha generation and ESG metrics, and measure the impact companies have on the U.N.’s Sustainable Development Goals (SDG´s). First, we construct a sector-neutral portfolio using MSCI ESG momentum scores from 2013 to 2018, and determine that it is feasible to generate positive alpha vis a vis the MSCI US index. Second, we utilize structured and unstructured data to determine a company’s net influence on the SDGs, what we call its SDG ‘footprint.’ We show that an ESG momentum portfolio both outperforms the MSCI US index and has a relatively better SDG footprint than that of the index. Third, we establish a positive contemporaneous connection between the portfolio’s ESG ratings momentum and its SDG footprint. Thus, a positive linkage exists between ESG, alpha, and the SDG’s.
Keywords: ESG, SDG, asset management, fiduciary duty, alpha, sustainable investing, risk factors
JEL Classification: G1
Suggested Citation: Suggested Citation