The Impact of Sustainability on Portfolio Returns: A Factor Analysis

Karolina Elisabet Stenberg & Alieke Johanna Francina Tielen

Student thesis: Master thesis


We evaluate whether sustainability affects portfolio returns for the European equity market for the sample period of 2002 to 2018.The Fama and French 3-Factor Model is extended with factors constructed based on ESG score, industry relative ESG score and the EU ETS cap-and-trade system. The model that best explains portfolio returns is a 5-Factor Model with factors for CAPM, SMB, HML, ESG and Industry ESG. Therefore, both ESG and Industry ESG affect equity portfolio returns on a cross-sectional level. This effect is negative and explained by either a high ESG score not being valued by investors, or by a large share of ESG motivated investors in the market. Furthermore, we find evidence for low ESG stocks behaving like small stocks.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages106
SupervisorsBersant Hobdari