Seeking Financial Performance by avoiding ESG Risks: Sustainable investing in the world of equities

Abstract

The present study investigates the integration of environmental, social, and governance (ESG) scores constructed from company misconduct and incident data into the systematic investment process for equities. These ESG scores are used to set up various ESG investment strategies: From best-in-class and exclusionary screening to sustainability themed investing. The performance of these strategies is evaluated in a realistic investment setting in the United States, European, and Swiss markets and empirical results show that these scores, reflecting how companies are facing ESG-related risk, are a key factor of distinguishing financial performance. On a risk-adjusted basis, portfolios consisting of top ESG scorers consistently outperformed the benchmark whereas portfolios built from selecting bottom ESG scorers consistently underperformed it across all investigated universes.

Keywords: Sustainable Finance, ESG investing, ESG risk, Equities, Quantitative Investing

JEL Classification: C55, C58, C63, G11, G12, Q50