The added value and differentiation among ESG investment strategies in stock markets

Abstract

Environmental, social, and governance (ESG) investment strategies have garnered increasing attention in stock markets worldwide. The number of related funds and their money inflow, for instance, have more than doubled over the past 3 years. Yet, one fundamental question remains unanswered in the specialized literature: has there been any added value and statistical differentiation among ESG strategies in stock markets? We contribute to this discussion by assessing a range of ESG investment strategies across the globe. Daily closing prices of ESG best practices indices are collected for the period between 2011 and 2021, along with proxies for the market portfolio and the risk-free rate. Empirical assessments are then conducted using classic and modern portfolio metrics as well as nonparametric tests. The results indicate a considerable degree of differentiation of the governance factor in every region studied, while the environmental and social agendas have remained considerably intertwined, with their theoretical portfolios showing similar risk-return profiles and high levels of correlation. The relative performance of ESG factors across regions has also varied considerably, with most developed economies prioritizing the environmental and social agenda for investments, and the governance factor providing better risk-adjusted returns in emerging markets and in the Unites States. Implications and an agenda for future research are further discussed.

Socially responsible investments: A retrospective review and future research agenda

“…Pacelli et al (2022) analyzed the link between the performance and the ESG score of different sectoral portfolios and concluded that sustainable investment performance is still heterogeneous worldwide. Meira et al (2022) assessed ESG strategies worldwide. They reported significant differentiation of the governance factor in every region, while the environmental and social portfolios showed similar risk-return profiles and high levels of correlation.…”

Assessing the impact of corporate environmental performance on efficiency improvement in labor investment

“…Second, companies with strong ESG records are often viewed as more attractive to investors/creditors and may have an easier time securing external financing. Investors are becoming more focused on ESG performance when considering investment opportunities (Meira et al, 2022). Prioritizing social and environmental issues and taking steps to address them can help to reduce the risk of insider misconduct, as well as provide a more secure and profitable environment for investors/creditors.…”

How does investor attention affect energy firms' managerial opportunistic behavior? New evidence from China

“…As a result, investor attention affects not only stock market prices but also firms' behavior including managers' strategic decision making (Abramova et al, 2020; Hristov & Appolloni, 2022) and corporate financial reporting (Arya & Mittendorf, 2007). Investor concerns have the potential to transform investor investment in green and low‐carbon energy projects by influencing corporate earnings management (Meira et al, 2022).…”

“…Third, investors have started to lose trust and confidence in traditional energy firms and shifted their attention towards new energy firms due to the aforementioned green policies and increasing public awareness of environmental protection (Kyaw et al, 2022). Accordingly, investors are gradually divesting from the traditional energy sector and investing in the clean energy sector (Meira et al, 2022; Tian et al, 2022). As such, traditional energy firms have a stronger managerial propensity to adopt earnings management to manipulate investor expectations as a way to fulfill their financing demands and guarantee personal career agenda (Garel et al, 2021).…”