Environmental transition alignment and portfolio performance

Abstract

We contribute to the debate on whether using ESG/SRI criteria in investment decisions improves portfolio performance. The choice of a specific ESG metric being crucial, we focus on the Net Environmental Contribution, a robust open-source measure of environmental transition alignment. From a universe of 752 European stocks, we select subsets of stocks with high and low NEC scores, and compare the performance of equal-weighted and capitalization-weighted portfolios constructed from these subsets over the 2015-2020 period. The high-NEC portfolios outperform the low-NEC ones consistently throughout the period, and particularly during 18 months starting mid-2019, both before and during the COVID crisis.

Keywords: ESG, Net Environmental Contribution, portfolio performance, factor model, environmental transition, transition risk

JEL Classification: G11