The Impact of ESG-Scores on Portfolio Performance - A quantitative study on sustainable investments.

Abstract: This report examines the relationship between ESG-scores and portfolio returns using the Fama-French five-factor and Carhart four-factor models. The data is collected from Refinitiv (2023) between 2003 and 2021 and consists of firms listed on the NYSE and NASDAQ stock exchange. Factors are constructed based on sample data and also collected from French (2023) for comparison. An Ordinary least squares(OLS) and an Iteratively reweighted least squares(IRLS) method is used to estimate abnormal returns. This study finds that there is no significant evidence of abnormal returns for a high-rated, a low-rated or a long-short portfolio. The high and low portfolios are constructed by picking the 10% top and bottom rated companies based on the previous year’s ESG-score. The portfolios were reconstructed every year based on this ESG-dependent investment strategy for a period of 19 years. The results show portfolio’s exposure to market movements, size, book-to-market, operating profitability, investment ratio and momentum. Overall, the study suggests that ESG scores do not necessarily lead to abnormal returns in the stock market. Instead, we found that the portfolio of the 10% lowest ESG-scored companies outperformed all other portfolios including the SP500 returns during the period, although there were no proof of significance in the result.