Does sustainability pay off? A multi-factor analysis on regional DJSI and renewable stock indices

Abstract

The private sector arguably plays a greater role in sustainability transitions through private investment. The authors apply the four-and five-factor Fama-French models to the Dow Jones Sustainability Index (DJSI) and a range of renewable energy indices to evaluate the financial attractiveness of sustainability in general, relative to alternative investments. They find both overperformance and underperformance in the regional DJSIs over the period 2006-2016. In contrast, renewable energy indices have high betas and negative alphas, which makes them financially unattractive. These results imply the need for public support in sustainability transitions, as high risk and low return deter private investment.

Sustainable Development Goals and Investment Strategies: The Profitability of Using Five-Factor Fama-French Alphas

“…He found that the five-factor model outperformed the three-factor one in Eastern Europe and Latin America but failed in the Asian region. From an SRI perspective, the works of Joliet and Titova [3] and Sokolovska and Kešeljević [5] also employed this five factor model in order to analyses the performance of different SRI funds an indices, respectively. On the other hand, Mohanty [57] tested different asset models on 22 developed markets and 21 emerging markets and pointed out that each market is unique in its composition and trend, and hence, a generalized approach cannot be adopted across all the markets.…”

“…These indices represent a useful tool for SRI investors, who use them to identify the target companies for their SRI strategies. Because of that, there are also numerous studies that, by employing the same methodology based on multi-factor asset pricing models, have focused on analyzing the evolution and performance of sustainable stock indices compared to conventional ones such as those conducted by Sauer [38], Statman [39], Schröder [40], Consolandi et al [41] and Managi et al [42], and more recently by Cunha et al [18], Jain et al [43] and Sokolovska and Kešeljević [5].…”

“…Moreover, this article takes into account previous empirical evidence that has extensively employed multi-factor asset pricing models to explain the cross-sectional variation in expected returns of Socially Responsible Investments (SRI). This is the case, for instance, in the recent works of Joliet and Titova [3], who assessed the fundamental characteristics of SRI funds using the Fama-French five-factor model [4], finding that screening criteria guide investment decisions, or Sokolovska and Kešeljević [5] who found both overperformance and underperformance in the 2 of 16 regional Dow Jones Sustainability Indexes over the period 2006-2016 and stated that renewable energy indices are financially unattractive; however, to the best of our knowledge there is no empirical evidence on SDG assets employing this methodology. Moreover, this article follows the line of Sarwar et al [6], who proposed estimating this five-factor model using a rolling window and then developing a long-only or a long-short trading strategy where the signals are provided by the model's alpha that represents the risk-adjusted expected return.…”

Exploring the Key Driving Forces of the Sustainable Intergenerational Evolution of the Industrial Alliance Innovation Ecosystem: Evidence from a Case Study of China’s TDIA

“…Firms acting in environmentally sensitive industries with sustainability reporting have higher market valuations [19]. Third, policy and public support are needed for sustainability transitions [20]. Different categories of network management strategies (policy mix) could be deployed to advance collaboration among actors [21].…”

Correlation between the DJSI Chile and the Financial Indices of Chilean Companies

“…In addition to systemic risk, the results of research on the European DJSI have provided insights into the excess return that was positive and negative but statistically insignificant in other DJSI specifications (Sokolovska and Keseljevic 2019;López et al 2007). Variations in sustainability indices differ from those of the main market indices.…”