Sustainable Versus Non-Sustainable Equities: An Empirical Analysis of Return, Risk and Liquidity

Abstract: In order to create a sustainable portfolio, more sustainable assets may be chosen to be included and less sustainable assets may be chosen to be excluded from the portfolio. A potential risk that could arise as a result, is that the choice to include or exclude assets may affect the liquidity profile of the portfolio. For example if less liquid assets are included and more liquid assets are excluded. This thesis thus aims to investigate how the liquidity, but also other risks related to a stock portfolio, are related to the assets chosen to be included or excluded from the portfolio.  The main results obtained showed that the both the more and less sustainable assets on average had similar liquidity risk when considering the volume-based measure ILLIQ and the price-based measure MEC. The transaction cost-based measure the bid-ask spread, showed that the more sustainable assets had a significantly lower spread than the less sustainable, indicating that the market has a harder time agreeing on a fair price for these assets. The more sustainable assets also had a lower risk of potential losses compared to both the less sustainable and the market as a whole when considering the weekly returns, and also performed better over the considered time period. However, the less sustainable assets were shown to be slightly less volatile compared to the other assets.