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ESG-Based Factor Investing

Bergström, Martin LU and Svensson, Jacob LU (2020) NEKN02 20201
Department of Economics
Abstract
The purpose of this thesis is to examine if there is a cost, in terms of lower risk-adjusted returns, associated with using ESG factors in the portfolio creation process. The ability of using an ESG Smart Beta strategy, to outperform a passive cap-weighted index and a regular Smart Beta strategy in terms of risk-adjusted returns, was examined. By adopting a Smart Beta methodology, seven different portfolios were constructed, for which the Russell 3000 worked as the investment universe and benchmark. The portfolios consisted of two pure financial portfolios, and five portfolios utilizing ESG factors. The results indicate that it is possible to create excess returns and enhance risk-adjusted returns against a regular Smart Beta strategy and... (More)
The purpose of this thesis is to examine if there is a cost, in terms of lower risk-adjusted returns, associated with using ESG factors in the portfolio creation process. The ability of using an ESG Smart Beta strategy, to outperform a passive cap-weighted index and a regular Smart Beta strategy in terms of risk-adjusted returns, was examined. By adopting a Smart Beta methodology, seven different portfolios were constructed, for which the Russell 3000 worked as the investment universe and benchmark. The portfolios consisted of two pure financial portfolios, and five portfolios utilizing ESG factors. The results indicate that it is possible to create excess returns and enhance risk-adjusted returns against a regular Smart Beta strategy and a benchmark index, by using ESG factors in combination with a fundamental investment strategy such as Smart Beta. Investors do not sacrifice any risk-adjusted returns, and the effects are particularly strong when ESG factors are combined with regular financial factors such as Value or Quality. (Less)
Please use this url to cite or link to this publication:
author
Bergström, Martin LU and Svensson, Jacob LU
supervisor
organization
alternative title
ESG factors ability to enhance risk-adjusted returns in Smart Beta investment strategies
course
NEKN02 20201
year
type
H1 - Master's Degree (One Year)
subject
keywords
ESG, Smart Beta, Factor Investing
language
English
id
9017481
date added to LUP
2020-08-29 11:12:44
date last changed
2020-08-29 11:12:44
@misc{9017481,
  abstract     = {{The purpose of this thesis is to examine if there is a cost, in terms of lower risk-adjusted returns, associated with using ESG factors in the portfolio creation process. The ability of using an ESG Smart Beta strategy, to outperform a passive cap-weighted index and a regular Smart Beta strategy in terms of risk-adjusted returns, was examined. By adopting a Smart Beta methodology, seven different portfolios were constructed, for which the Russell 3000 worked as the investment universe and benchmark. The portfolios consisted of two pure financial portfolios, and five portfolios utilizing ESG factors. The results indicate that it is possible to create excess returns and enhance risk-adjusted returns against a regular Smart Beta strategy and a benchmark index, by using ESG factors in combination with a fundamental investment strategy such as Smart Beta. Investors do not sacrifice any risk-adjusted returns, and the effects are particularly strong when ESG factors are combined with regular financial factors such as Value or Quality.}},
  author       = {{Bergström, Martin and Svensson, Jacob}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{ESG-Based Factor Investing}},
  year         = {{2020}},
}