Sustainable Investments

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This paper investigates the relationship between financial performance and sustainable performance. More specifically, it investigates whether sustainable firms outperform less sustainable firms. The sustainable performance is based on companies received ESG score. The ESG rating system is based on three equally weighted pillars, environmental, social and governance. The study is based on stocks in the NYSE for the estimated period, January 1st, 2004 - December 31st, 2017. I deploy the study by constructing three types of portfolios; the first one for high rated stocks, the second one for low rated stocks and the third one is a difference portfolio. The absolute return, average monthly excess return, volatility, Sharpe Ratio and three types of regressions, the CAPM, Fama-French three-factor model and Fama-French five-factor model measure the firm performance. The results found are for the most part inconclusive because of insignificant estimators. However, a great part of the result suggests a positive relationship between sustainability and financial performance. A long-short portfolio is constructed in order to measure whether the high ESG stock has greater performance than the low ESG stocks. The alpha found for most of the long-short portfolios are positive meaning that the difference portfolios make positive abnormal returns. The long-short strategy is therefore even good enough to beat the market. The result is insignificant which means that the abnormal return is not statistically reliable. The behavioral finance theory could explain the increasing trend as a result of shifting personal preferences or misguiding information. The traditional finance theory would argue for greater financial performance for the high rated stocks.

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