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Sustainable Investments

Sandberg, Märta LU (2019) NEKH01 20182
Department of Economics
Abstract
This paper investigates the relationship between financial performance and sustainable performance. More specifically, it investigates whether sustainable firms outperform less sustainable firms. The sustainable performance is based on companies received ESG score. The ESG rating system is based on three equally weighted pillars, environmental, social and governance. The study is based on stocks in the NYSE for the estimated period, January 1st, 2004 - December 31st, 2017. I deploy the study by constructing three types of portfolios; the first one for high rated stocks, the second one for low rated stocks and the third one is a difference portfolio. The absolute return, average monthly excess return, volatility, Sharpe Ratio and three... (More)
This paper investigates the relationship between financial performance and sustainable performance. More specifically, it investigates whether sustainable firms outperform less sustainable firms. The sustainable performance is based on companies received ESG score. The ESG rating system is based on three equally weighted pillars, environmental, social and governance. The study is based on stocks in the NYSE for the estimated period, January 1st, 2004 - December 31st, 2017. I deploy the study by constructing three types of portfolios; the first one for high rated stocks, the second one for low rated stocks and the third one is a difference portfolio. The absolute return, average monthly excess return, volatility, Sharpe Ratio and three types of regressions, the CAPM, Fama-French three-factor model and Fama-French five-factor model measure the firm performance. The results found are for the most part inconclusive because of insignificant estimators. However, a great part of the result suggests a positive relationship between sustainability and financial performance.

A long-short portfolio is constructed in order to measure whether the high ESG stock has greater performance than the low ESG stocks. The alpha found for most of the long-short portfolios are positive meaning that the difference portfolios make positive abnormal returns. The long-short strategy is therefore even good enough to beat the market. The result is insignificant which means that the abnormal return is not statistically reliable.

The behavioral finance theory could explain the increasing trend as a result of shifting personal preferences or misguiding information. The traditional finance theory would argue for greater financial performance for the high rated stocks. (Less)
Please use this url to cite or link to this publication:
author
Sandberg, Märta LU
supervisor
organization
course
NEKH01 20182
year
type
M2 - Bachelor Degree
subject
keywords
Sustainable investments, financial performance, ESG rating, Fama-French three-factor model, Fama-French five-factor model, CAPM
language
English
id
8973498
date added to LUP
2019-03-29 09:43:04
date last changed
2019-03-29 09:43:04
@misc{8973498,
  abstract     = {{This paper investigates the relationship between financial performance and sustainable performance. More specifically, it investigates whether sustainable firms outperform less sustainable firms. The sustainable performance is based on companies received ESG score. The ESG rating system is based on three equally weighted pillars, environmental, social and governance. The study is based on stocks in the NYSE for the estimated period, January 1st, 2004 - December 31st, 2017. I deploy the study by constructing three types of portfolios; the first one for high rated stocks, the second one for low rated stocks and the third one is a difference portfolio. The absolute return, average monthly excess return, volatility, Sharpe Ratio and three types of regressions, the CAPM, Fama-French three-factor model and Fama-French five-factor model measure the firm performance. The results found are for the most part inconclusive because of insignificant estimators. However, a great part of the result suggests a positive relationship between sustainability and financial performance. 

A long-short portfolio is constructed in order to measure whether the high ESG stock has greater performance than the low ESG stocks. The alpha found for most of the long-short portfolios are positive meaning that the difference portfolios make positive abnormal returns. The long-short strategy is therefore even good enough to beat the market. The result is insignificant which means that the abnormal return is not statistically reliable. 

The behavioral finance theory could explain the increasing trend as a result of shifting personal preferences or misguiding information. The traditional finance theory would argue for greater financial performance for the high rated stocks.}},
  author       = {{Sandberg, Märta}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Sustainable Investments}},
  year         = {{2019}},
}