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Establishing ESG as a systematic risk factor in portfolio construction
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The paper develops a micro and macro analysis to estimate ESG as a quantitative factor in portfolio construction. It uses top-down and bottom-up considerations to respectively assess the exposure of U.S. funds to a built-up ESG factor and to state the expected contribution to excess returns of ESG stocks. The reader will empirically find that equity funds are tilted towards ESG stock seven predicting a negative impact on portfolio returns in the short run. The exposure is justified mainly by future expectations and stringent regulations. Lastly, with the aim of tangibly applying the theoretical model, Thematic Funds were highlighted.
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Sustainability Finance Stock returns Financial performance Factor investing ESG integration Mutual funds Environmental regulations Active management Portfolio construction