Is ESG a Systematic Risk Factor for US Equity Mutual Funds?

Jin, I. 2018. “Is ESG a systematic risk factor for US equity mutual funds?” Journal of Sustainable Finance & Investment, 8 (1): 72-93. DOI: 10.1080/20430795.2017.1395251

47 Pages Posted: 5 Jan 2021

See all articles by Ick Jin

Ick Jin

National Assembly Budget Office

Date Written: October 18, 2018

Abstract

Although the environmental, social, and governance (ESG) has gained increasing attention among investors, the extent to which ESG is compensated systematically in the market remains to be investigated. On the outperformance of responsible investing (RI) which incorporates ESG into investment decisions, the empirical evidence to date is inconsistent from the viewpoint of ex-post performance. This paper tries to explain the nature of return differential between RI and conventional investing within the well-known risk-return paradigm. From the viewpoint of ex-ante equity risk premium (ERP), the five factor model of Fama and French (2015) combined with a ESG-related factor applies to returns on 1,425 US open-end equity funds for the period from April 2009 to December 2016. Empirical findings include: i) US open-end equity funds tend to hedge the ESG-related systematic risk, ii) the exposure to ESG-related systematic risk is significantly priced in the market, and iii) equity funds have become more capable to factor CSP into their investment decisions.

Keywords: ESG, CSP, Responsible Investing, Downside Protection, Systematic Risk

JEL Classification: C15, G11, G12, G13, G22, G33

Suggested Citation

Jin, Ick, Is ESG a Systematic Risk Factor for US Equity Mutual Funds? (October 18, 2018). Jin, I. 2018. “Is ESG a systematic risk factor for US equity mutual funds?” Journal of Sustainable Finance & Investment, 8 (1): 72-93. DOI: 10.1080/20430795.2017.1395251, Available at SSRN: https://ssrn.com/abstract=3722477

Ick Jin (Contact Author)

National Assembly Budget Office ( email )

1 Uisadang-daero Yeongdeungpo-gu
Seoul
Korea, Republic of (South Korea)
821088830916 (Phone)

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