Systematic Factor Investing with ESG

Christopher Winkel Gorrissen, Erik Harald Bøgh & Philip Maldia Madsen

Student thesis: Master thesis


Factor investing has a well-established and increasingly important role in an investors’ portfolio. Much research has been done on the premiums these factors can provide. This paper uses data, free of survivorship bias, to show further evidence of a value and momentum premium on the equally weighed S&P 500 Index. Furthermore, it extends the research by incorporating the highly popular element, ESG, in several combinations of the joint portfolio of the value factor and the momentum factor. Previous research has indicated that combining these two factors may improve the risk-adjusted returns. This paper will make use of two slightly different portfolio implementation methods, the mixed approach and the integrated approach. These approaches will be applied in order to seek an excess return compared to the benchmark, the equally weighed S&P 500 Index. The findings lead to the conclusion that integrating ESG is in way a no hindrance, on the contrary, it is a particularly useful tool that leads to risk mitigation and powerful enhancement of the value and momentum strategies in our sample period. In addition, the research indicates to the finding that the mixed portfolio approach attains a higher excess return than that of the integrated approach. Moreover, it is concluded that portfolio turnover and transaction costs are an important consideration to take into account and has, dependent on cost assumption, a significant impact on the excess return. For a study such as the one provided in this paper, it usually raises more questions than answers even though the results may seem quite compelling. Since the results in this thesis are based on backtests, it can be argued that these strategies may not hold up in the future. Another question raised, could be whether these strategies could be implemented on other, less liquid, markets than the American stock market. Finally a much more thorough deep-dive could be done into ESG and to discuss whether it actually is a correct measure for companies’ sustainability efforts.

EducationsMSc in Business Administration and Mathematical Business Economics, (Graduate Programme) Final Thesis
Publication date2020
Number of pages167
SupervisorsMichala Hjelm-Hansen