Parametric portfolio policies with ESG -There is no cost

Abstract: We propose an investment strategy with the potential for investors to gain a stronger environmental, social, and corporate governance (ESG) profile without a negative impact on performance. Specifically, we study the performance of a parametric portfolio policy when utilizing ESG score and ESG momentum characteristics in addition to value and momentum, in contrast to utilizing value and momentum only. We compare the performance of these two policies using both fixed and dynamic coefficients modelled with generalized autoregressive score (GAS). Our sample covers all S&P 500 constituents over the period Feb 2003 to Jan 2021. We find the “policy with ESG” to perform significantly better in-sample. Out-of-sample results show some tendency for the “policy with ESG” to perform better compared to the “policy without ESG”, although the difference in performance is not significant. Additionally, we find the “policy with ESG” to have consistently higher average ESG portfolio scores, suggesting the potential for investors to gain a stronger ESG profile without sacrificing financial returns.