Financial Performance of ESG-motivated Investment Strategies: A Study on the Out-of-sample Risk-adjusted Performance of ESG-motivated Investment Strategies Compared to the S&P500

Alexander Matthew Kirkedal & Lasse Skafsgård Klausen

Student thesis: Master thesis


The purpose of this thesis is to evaluate the out-of-sample risk-adjusted performance of four active ESG-motivated investment strategies: Best-in-Class, Exclusionary Screening, Momentum, and Thematic Investing. With increasing interest from investors, the focus on environmental, social, and governance (ESG) factors has become essential to the investment world. On a global scale, approximately 25% of the total assets under management consider ESG factors.

Existing literature has extensively focused on the causality between ESG and corporate financial performance, where inconclusiveness seems to be prevalent. There is, however, some evidence pointing towards a nonnegative relationship between ESG and financial performance. Consequently, this thesis seeks to add to the existing body of literature by investigating the out-ofsample performance of investment portfolios solely selected on ESG considerations.

In the construction of portfolios, we implement the four ESG-motivated strategies on a US based stock price dataset from 2010-2019. We apply a rolling window estimation to obtain inputs for the mean-variance optimization and the equally weighted portfolio approaches. Subsequently, we evaluate the out-of-sample risk-adjusted performance by using Sharpe ratio and Jensen’s alpha in comparison to the risk-adjusted return of the American S&P500.

Our key findings are summarized as follows: i) For mean-variance optimized portfolios, ESGmotivated strategies generally outperform the S&P500 in terms of Sharpe ratio and Jensen’s alpha. For equally weighted portfolios, these strategies generally underperform. ii) We find that momentum shows highest risk-adjusted performance in both portfolio settings. iii) Across the four ESG-motivated strategies, we observe that the governance (G) factor demonstrates highest association with financial performance. iv) Our results indicate that the social (S) factor exhibits the weakest relation to financial performance of our ESG-motivated investment strategies.

In spite of potential methodological differences, our findings are, to some extent, consistent with previous studies, where momentum as a strategy and governance as a factor, has shown to exhibit high correlation to corporate financial performance. Our results contribute to the performance evaluation of ESG-motivated strategies and could therefore be of interest to investors that seek to incorporate ESG.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2020
Number of pages133
SupervisorsMarcel Fischer