The Implementation of the ESG Momentum in Factor Investing: Theoretical and Empirical Approach

Catharina Pohl & Frida Johanne Lund

Student thesis: Master thesis


As the global assets under management considering sustainable investment criteria steadily increases, new ESG investment strategies emerge aiming for the generation of alpha and outperforming the benchmark. One of these strategies is the ESG Momentum strategy, building on the assumption of a positive relationship between the improvement of a firm’s ESG profile and its financial performance. Based on ESG data from MSCI, we are empirically testing the performance of a long-short portfolio in the highest and lowest ESG Momentum firms respectively for the U.S. and Europe. We further develop a factor for the integration into the Carhart 4-factor model to account for a potential systematic outperformance. While we are estimating a cumulative performance of this long-short strategy of 23% above the risk-free rate over a time horizon of 8 years, the constructed factor portfolio yields only a small and insignificant outperformance. By integrating this ESG Momentum factor as an additional explanatory variable, we find a performance-enhancing e˙ect of the factor on portfolio performance in Europe, while only insignificant and negative loadings in U.S. portfolios. We thereby develop a first approach for the integration of the ESG Momentum into factor investing and build a solid foundation for future research due to partly insignificant results and data limitations.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages128
SupervisorsMads Stenbo Nielsen