ESG factors are becoming mainstream in portfolio investment strategies, attracting increasing fund inflows from investors who are aligning their investment values to Sustainable Development Goals (SDG) declared by the United Nations Principles for Responsible Investments. Do investors sacrifice return for pursuing ESG-aligned megatrend goals? The study analyses the risk-adjusted financial performance of ESG-themed megatrend investment strategies in global equity markets. The analysis covers nine themes for the period 2015–2019: environmental megatrends covering energy efficiency, food security, and water scarcity; social megatrends covering ageing, millennials, and urbanisation; governance megatrends covered by cybersecurity, disruptive technologies, and robotics. We construct megatrend factor portfolios based on signalling theory and formulate a novel measure for stock megatrend exposure (MTE), based on the relative fund flows into the corresponding thematic ETFs. We apply pure factor portfolios methodology based on constrained WLS cross-sectional regressions to calculate Fama-French factor returns. Time-series regression rests on the generalised method of moments estimator (GMM) that uses robust distance instruments. Our findings show that each environmental megatrend, as well as the disruptive technologies megatrend, yielded positive and significant alphas relative to the passive strategy, although this outperformance becomes statistically insignificant in the Fama-French 5-factor model context. The important result is that most of the megatrend factor portfolios yielded significant non-negative alphas; which supports our assumption that megatrend investing strategy promotes SDGs while not sacrificing returns, even when accounting for transaction costs up to 50bps/annum. Higher transaction costs, as is the case for some of these ETFs with expense ratios reaching 80-100bps, may be an indication of two things: ESG-themed megatrend investors were willing to sacrifice ca. 30-50bps of annual return to remain aligned with sustainability targets, or that expense ratio may well decline in the future.
The article uses pure factor portfolios formed by multivariate cross-sectional regressions to examine whether these active investment strategies could achieve excess return relative to passive strategies. The hypothesis can also be construed as a test of market efficiency. The study includes ten style factors. Our empirical study shows that a consensus buy strategy of the pure value factor yielded significant positive excess returns in the past almost 20 years. Size and momentum factors characterised in the literature by positive excess return are not significant in our study. Excess return of the factors capturing riskiness (earnings variability, volatility, leverage) is significant and negative, which corroborates with our expectations, rendering a consensus sell investment strategy successful, based on these factors. The profitability, growth and trading activity factors produced results contrary to our expectations; therefore, excess return could have been achieved via a contrarian selling strategy. Our research results are consistent with the weak form of market efficiency analyses.
KÖZ-GAZDASÁG 2020/2 164 2018 company-level data and performed on a 1,099-element firm sample from the MSCI ACWI Index. Regression calculations rest on the weighted least squares (WLS) method.The dependent variable is the return on sales (ROS, 2018); the control variables are previous year (2017) profitability, size, leverage, growth, capital intensity, industry and regional dummies. The empirical results show that higher ESG, E, and S ratings do not change profitability significantly in the short run. However, corporate governance has a significant and positive effect at 5.00 per cent: a 10-point increase in G score increases ROS by 0.30 percentage points. Another important conclusion is that social and environmental factors, which often interpreted as mere costs, do not significantly reduce short-term profitability. This latter finding implies that companies should invest in ESG projects as they will not experience evaporating profits but might contribute to achieving some of the Sustainable Development Goals of the United Nations.
This study aims to find the answer to the question how the ESG performance of the companies in the MSCI ACWI Index affects short-term profitability. The dependent variables of the analysis are the return on sales and the ROC/WACC ratio measuring added value. The ESG scores are the S&P Global SAM ratings. As the goal of the study is to assess the short-term effects, the 2019 profitability-ESG relation is examined along with several control variables. In studies analysing sustainability, measurement, specification errors and endogeneity are frequent which we manage by applying GMM procedure with robust instrumental variables. Based on our calculations, the relationship between financial and ESG performance is mostly neutral in the specific industries, which may help the achievement of the sustainable development goals of the United Nations in the long run.
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