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ESG Portfolios in Different Markets - Investigating the Relationship Between ESG Performance and Financial Performance

Wolff, Ludwig LU (2022) NEKP01 20221
Department of Economics
Abstract (Swedish)
By applying one of the largest datasets on ESG ratings to date with around 8000 companies included during the sample period between 2006-2021. This paper investigates the increasingly popular link between firms’ social and financial performance and the potential abnormal returns to be found using ESG investment strategies. To examine this relationship, a series of portfolios are constructed based on firms with high and low ESG ratings as well as portfolios taking the difference between the high and the low portfolios to measure abnormal returns between the two. To check the results for robustness, additional portfolios are implemented based on variables such as portfolio size, subperiods, weighting method, and finally, firm selection... (More)
By applying one of the largest datasets on ESG ratings to date with around 8000 companies included during the sample period between 2006-2021. This paper investigates the increasingly popular link between firms’ social and financial performance and the potential abnormal returns to be found using ESG investment strategies. To examine this relationship, a series of portfolios are constructed based on firms with high and low ESG ratings as well as portfolios taking the difference between the high and the low portfolios to measure abnormal returns between the two. To check the results for robustness, additional portfolios are implemented based on variables such as portfolio size, subperiods, weighting method, and finally, firm selection criteria where a best-in-class approach is applied. The portfolios are then evaluated using the Carhart (1997) four-factor model. The result in this paper indicates that difference portfolios fail to find any consistent abnormal performance between investing in portfolios containing high ESG-rated firms and low ESG-rated firms across the three regions for the entire period. When looking at the individual high and low-rated portfolios, the low-rated portfolios frequently outperform their high counterpart, and when splitting the sample period in two and applying different robustness tests, some patterns of significant abnormal returns are found. The results also visibly show higher abnormal returns for the high (low) portfolios using equally weighted stocks than weighting based on market capitalization. The overall presence but inconsistency of the significant alphas in the portfolios suggest investors to be cautious but curious in the attempts of investment strategies based on ESG portfolios (Less)
Please use this url to cite or link to this publication:
author
Wolff, Ludwig LU
supervisor
organization
course
NEKP01 20221
year
type
H2 - Master's Degree (Two Years)
subject
keywords
ESG Portfolios, Abnormal Returns, Carhart Four-Factor Model, U.S, Europe, Emerging markets
language
English
id
9102547
date added to LUP
2022-11-03 09:24:08
date last changed
2022-11-03 09:24:08
@misc{9102547,
  abstract     = {{By applying one of the largest datasets on ESG ratings to date with around 8000 companies included during the sample period between 2006-2021. This paper investigates the increasingly popular link between firms’ social and financial performance and the potential abnormal returns to be found using ESG investment strategies. To examine this relationship, a series of portfolios are constructed based on firms with high and low ESG ratings as well as portfolios taking the difference between the high and the low portfolios to measure abnormal returns between the two. To check the results for robustness, additional portfolios are implemented based on variables such as portfolio size, subperiods, weighting method, and finally, firm selection criteria where a best-in-class approach is applied. The portfolios are then evaluated using the Carhart (1997) four-factor model. The result in this paper indicates that difference portfolios fail to find any consistent abnormal performance between investing in portfolios containing high ESG-rated firms and low ESG-rated firms across the three regions for the entire period. When looking at the individual high and low-rated portfolios, the low-rated portfolios frequently outperform their high counterpart, and when splitting the sample period in two and applying different robustness tests, some patterns of significant abnormal returns are found. The results also visibly show higher abnormal returns for the high (low) portfolios using equally weighted stocks than weighting based on market capitalization. The overall presence but inconsistency of the significant alphas in the portfolios suggest investors to be cautious but curious in the attempts of investment strategies based on ESG portfolios}},
  author       = {{Wolff, Ludwig}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{ESG Portfolios in Different Markets - Investigating the Relationship Between ESG Performance and Financial Performance}},
  year         = {{2022}},
}