The Sustainability Conundrum

Abstract

Sustainable or ESG investing remains a topic of keen debate. Thousands of research papers have been dedicated to answering the question of whether sustainable investing adds to, subtracts from, or has no impact on portfolio performance. Unfortunately, the databases that accumulate sustainable metrics are both inconsistent and incomplete, leading to a large dispersion of results and conclusions. In this article, the authors devise an empirical test of the value of sustainable investing that does not depend upon the choice of sustainable database or metrics used. They find that sustainable investing produced a negative alpha relative to a portfolio not constrained by a sustainable mandate. They also identify a sustainable beta factor that is successful in screening both companies and asset managers as green or non-green. This is an important step in building a factor model for sustainable investing.

TOPICS: Portfolio management/multi-asset allocation, ESG investing, factor-based models

Key Findings

• • An empirical analysis of Sustainable investment funds versus unconstrained investment funds found a negative alpha associated with the sustainable funds.

• • A sustainable factor can be identified and applied to both companies and fund managers.

• • Sustainable funds have consistent factor and sector tilts that must be accounted for as part of the portfolio construction process.