Passive income strategies: impact of Esg factors on the performance of Real Estate investment trusts

Abstract

Topic –Passive Income Strategies: Impact of Environment, Social, and Governance (ESG) Factors on the Performance of Real Estate Investment Trusts (REITs)Purpose–The purpose of this thesis is to investigate the relationship between the return of US REITs and ESG compliance by considering the investor perspective. Additionally, the thesis will separately examine in detail the implication of the ESG factor. Methodology –The research applies the Capital Asset Pricing Model (CAPM) and Carhart Four-Factor Model to obtain alphas for Best-In-Class and Worst-In-Class portfolios. To complement the results, Sharpe ratios were additionally calculated for the individual factor portfolios. The portfolios are constructed using a matched-sample approach based on age and size and rely on Bloomberg’s ESG Disclosure Scores to evaluate the sustainability of the individual REIT. The empirical section covers monthly return data over a sample period of five years from January 1st, 2014 to December 31st, 2018.Findings –The findings imply no statistically significant difference in risk-adjusted returns between the constructed Best-In-Class and Worst-In-Class portfolios for the respective factors. This suggests that investors can act in an exemplary manner when investing in REITs without sacrificing returns. Furthermore, the findings highlight the urgent need for regulated ESG disclosure guidelines to enhance transparency within the industry.