ESG: Why & How

Emil Nielsen & Naja Lydeking-Olsen

Student thesis: Master thesis

Abstract

The purpose of the research paper, ESG: Why & How, is to investigate responsibility investing in general and ESG investing in particular. It uses several perspectives and explores the concept from several distinct angles. It is divided into three primary, distinct sections each based on a different perspective. It takes departure in Danish investors and global stock portfolios. The first section explores the drivers behind the market from three different analytical levels; structural, organizational and individual. It concludes that strong pressures are present at all three levels. At the structural level the pressure mainly presents itself through legislative and social pressure; at the organizational level primarily through reputational risk mitigation; and at the individual level through unclear personal reasons and likely personal values. The second section tests the effect that ESG integration has on the financial performance of portfolios, created from global stocks. 14 ESG-screened investment universes are defined and compared with the unscreened universe. The effect is tested through two types of tests, both concluding that ESG-screening in the investment decision has no significant effect on the financial performance of portfolios. It can therefore be considered a free add-on. The third section is concerned with portfolio optimization and how to incorporate a third criterion in the process. Ordinarily portfolios are optimized according to two criteria; risk and return. In order to find the optimal portfolio in terms of ESG, a third variable is therefore necessary. In order to achieve this, a mean-variance-analysis is employed, as well as a proxy for an investor specific individual utility function. It is shown that it is possible to optimize portfolios on non-financial parameters and how to practically achieve this.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Management of Innovation and Business Development, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages196