Chasing Sustainable Stocks: A Superior Investment Decision? - An ESG Investment Study

Abstract: Sustainable investing is trending, amounting to $30 trillion in assets under management world-wide in 2018 and it is predicted to grow even larger in the years to come. This thesis studies ESG portfolio performance of three comparable portfolios, a Sustainable, a Good Enough and an Unsustainable portfolio constructed using ESG-score in relation to their Global Industrial Classification Standard (GICS), between 2004 - 2018 in the U.S market. The annual beta coefficients are examined between 2004-2013 to observe differences in exposure to systematic risk. Based on the observations, six trading strategies are constructed for the period 2014 - 2018 by combining the three portfolios in times of high and low market volatility. The market volatility level is determined using a relative measure of the CBOE VIX index. Focusing solely on ESG and comparing three portfolios based on GICS and ESG-scores as opposed to only comparing the two extremes, sustainable against unsustainable stocks, distances this study from previous research, thereby contributing with new testing methodology to this field. Furthermore, using an augmented version of the Fama-French five factor model and extending it with the Carhart (1997) momentum factor and later adding two liquidity factors from Pástor and Stambaugh (2003), contrasts this thesis from previous research. The results show that the Unsustainable portfolio generates the highest significant abnormal return of 8.26 % annually, followed by the Good Enough portfolio with 5.51 % and the Sustainable portfolio with 5.17 % in annual abnormal returns, over the period 2004-2018. This finding contradicts the belief that sustainable companies generate superior returns. Nonetheless, the Sustainable portfolio is a profitable investment as it generates positive abnormal returns. Further, using Trading Strategy 1, combining the Sustainable and Good Enough portfolio between 2014-2018, investors can generate significant yearly abnormal return of 3.4% while conforming to their sustainability preferences.