Sustainable Investment: Exploring the Linkage Between Alpha, ESG, and SDG's

Abstract

Even though the asset management industry has paid significant attention to environmental, social, and governance (ESG) investing over the past decade, few asset managers systematically incorporate ESG factors into portfolio construction. This is partly due to concerns over data quality and the perceived conflict between ESG objectives and fiduciary responsibilities. This thesis investigates whether it is feasible to generate positive alpha through an ESG momentum strategy while simultaneously improving alignment with the United Nations Sustainable Development Goals (SDGs). We construct sector-neutral portfolios using MSCI ESG momentum scores over the period 2017 to 2023 and assess their performance relative to the MSCI US index. In parallel, we use structured SDG alignment data to evaluate the sustainability footprint of portfolio constituents. Our findings show that ESG momentum portfolios outperform the benchmark in both total and risk-adjusted returns and exhibit higher SDG alignment scores. Moreover, the relationship between ESG momentum and SDG footprint is consistently observed across the full sample period. These findings indicate that ESG momentum can function as a dual purpose signal, supporting both financial performance and SDG alignment while also highlighting the broader connection between ESG improvements, alpha generation, and societal impact.