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

27 Pages Posted: 11 Jun 2020 Last revised: 1 Dec 2022

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: November 2022

Abstract

Despite Environmental, Social and Governance (ESG) investing attracting much attention in asset management this past decade, 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

Bekaert, Geert and Rothenberg, Richard V and Noguer, Miquel, Sustainable Investment - Exploring the Linkage between Alpha, ESG, and SDG's (November 2022). 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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