Sustainable Investment - Exploring the Linkage between Alpha, ESG, and SDG's

29 Pages Posted: 11 Jun 2020 Last revised: 4 Jun 2023

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Richard V Rothenberg

Global AI Co; Lawrence Berkeley National Laboratory; Global Algorithmic Institute

Miquel Noguer

Global AI Corp

Date Written: May 23, 2023

Abstract

Environmental, Social and Governance (ESG) investing has attracted much attention in asset management this past decade. Asset managers who consider ESG issues when making investment decisions potentially face a trade off with their fiduciary duty to attempt to outperform investment benchmarks (“generate alpha”). We first analyze the relationship between alpha generation and ESG metrics. However, because there are no well-accepted ESG standards, we also measure the impact companies have on the U.N.’s Sustainable Development Goals (SDG´s). Our research consists of three steps. 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-à-vis the MSCI US index and other risk benchmarks. Second, we utilize structured and unstructured data to determine a company’s net influence on the SDGs, which 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 SDGs for our sample.

Keywords: SDG, ESG, alpha, fiduciary duty, ESG momentum, sustainable investment,

JEL Classification: G1

Suggested Citation

Bekaert, Geert and Rothenberg, Richard V and Noguer, Miquel, Sustainable Investment - Exploring the Linkage between Alpha, ESG, and SDG's (May 23, 2023). Available at SSRN: https://ssrn.com/abstract=3623459 or http://dx.doi.org/10.2139/ssrn.3623459

Geert Bekaert (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

NY
United States

Richard V Rothenberg

Global AI Co ( email )

HOME PAGE: http://www.globalai.co

Lawrence Berkeley National Laboratory ( email )

1 Cyclotron Road
Berkeley, CA 94720
United States

HOME PAGE: http://www.lbl.gov

Global Algorithmic Institute ( email )

99 Wall St
Ste 5711
New York, NY 10002
United States
9173997840 (Phone)

HOME PAGE: http://www.global-ai.org

Miquel Noguer

Global AI Corp ( email )

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