The Incorporation of ESG Scores into Factor based Investment Decisions. Does ESG Integration necessarily come with a Financial Trade-off?
Abstract: The present study examines potential financial trade-offs in socially responsible investment strategies. It focuses on a period between September 2009 and November 2019 in Central Europe. While financial performance of an investment is measured by monthly risk-adjusted returns, social responsibility is represented by Sustainalytics ESG scores. First, to analyze the effect of ESG scores on financial stock performance, cross-sectional regressions are applied. To evaluate if the integration of ESG criteria into existing investment strategies significantly affects financial performance, hypotheses tests for equality of intercepts are applied to two self- constructed portfolios that follow the same investment strategy, of which however only one also invests in accordance with ESG criteria. The results of the cross-sectional regression on stock-level signal a negative relation between ESG scores and financial stock performance. A financial trade-off is only observable in one investment strategy while in the remaining strategies sustainable performance improves without significantly reducing financial performance.
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