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Do Environmental Portfolios Pay? Risk and return of environmentally friendly investment portfolios

Blanes Gravalos, Monica LU and Sedrakyan, Serine LU (2020) NEKN02 20201
Department of Economics
Abstract
In recent years, the interest for Sustainable Finance has substantially increased as a result of the investor’s awareness around climate change risks, and the transition to a low-carbon economy. In this thesis, we conduct an empirical analysis to investigate how incorporating environmental criteria in equity investment affects the portfolios' risk and return. The sustainability
performance is represented by Environmental Scores obtained from Sustainalytics, for a 124 monthly-observation period, from August 2009 to November 2019. With this data along with market capitalization, we were able to construct double-sorted portfolios, as well as sorted portfolios of high and low E scores. The performance of the constructed portfolios is analyzed... (More)
In recent years, the interest for Sustainable Finance has substantially increased as a result of the investor’s awareness around climate change risks, and the transition to a low-carbon economy. In this thesis, we conduct an empirical analysis to investigate how incorporating environmental criteria in equity investment affects the portfolios' risk and return. The sustainability
performance is represented by Environmental Scores obtained from Sustainalytics, for a 124 monthly-observation period, from August 2009 to November 2019. With this data along with market capitalization, we were able to construct double-sorted portfolios, as well as sorted portfolios of high and low E scores. The performance of the constructed portfolios is analyzed with two asset pricing models: Fama French Three-Factor Model and the Fama French Five-Factor Model. The study finds that firms with lower E scores have a tendency to outperform those with higher E scores. Since the volatility of the portfolios is also a subject of the research,
GARCH (1,1) is estimated to capture the time variation of the conditional variances and volatility clustering in the sample. The findings in this respect show that portfolios with high E scores tend to be less volatile, while portfolios of small companies with high and medium E scores tend to be highly sensitive to the market conditions recording more changes in the volatility level over time. (Less)
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author
Blanes Gravalos, Monica LU and Sedrakyan, Serine LU
supervisor
organization
course
NEKN02 20201
year
type
H1 - Master's Degree (One Year)
subject
keywords
Sustainable Finance, ESG, Environmental Scores, Portfolio Approach, Fama French risk factors, Univariate GARCH
language
English
id
9013777
date added to LUP
2020-08-29 11:13:04
date last changed
2020-08-29 11:13:04
@misc{9013777,
  abstract     = {{In recent years, the interest for Sustainable Finance has substantially increased as a result of the investor’s awareness around climate change risks, and the transition to a low-carbon economy. In this thesis, we conduct an empirical analysis to investigate how incorporating environmental criteria in equity investment affects the portfolios' risk and return. The sustainability
performance is represented by Environmental Scores obtained from Sustainalytics, for a 124 monthly-observation period, from August 2009 to November 2019. With this data along with market capitalization, we were able to construct double-sorted portfolios, as well as sorted portfolios of high and low E scores. The performance of the constructed portfolios is analyzed with two asset pricing models: Fama French Three-Factor Model and the Fama French Five-Factor Model. The study finds that firms with lower E scores have a tendency to outperform those with higher E scores. Since the volatility of the portfolios is also a subject of the research,
GARCH (1,1) is estimated to capture the time variation of the conditional variances and volatility clustering in the sample. The findings in this respect show that portfolios with high E scores tend to be less volatile, while portfolios of small companies with high and medium E scores tend to be highly sensitive to the market conditions recording more changes in the volatility level over time.}},
  author       = {{Blanes Gravalos, Monica and Sedrakyan, Serine}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Do Environmental Portfolios Pay? Risk and return of environmentally friendly investment portfolios}},
  year         = {{2020}},
}