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

43 Pages Posted: 15 Apr 2022

See all articles by William Martin

William Martin

SIM Global Advantage AG

Aleksandar Pramov

SIM Global Advantage AG

Dimitri Huwyler

SIM Global Advantage AG

Date Written: March 31, 2022

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

Suggested Citation

Martin, William and Pramov, Aleksandar and Huwyler, Dimitri, Seeking Financial Performance by avoiding ESG Risks: Sustainable investing in the world of equities (March 31, 2022). Available at SSRN: https://ssrn.com/abstract=4075534 or http://dx.doi.org/10.2139/ssrn.4075534

William Martin

SIM Global Advantage AG

Muensterhof 18
Zürich
Switzerland

Aleksandar Pramov (Contact Author)

SIM Global Advantage AG ( email )

Muensterhof 18
Zürich
Switzerland

Dimitri Huwyler

SIM Global Advantage AG ( email )

Muensterhof 18
Zürich
Switzerland

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