Can ESG : categories portfolios influence financial performance? Evidence from Europe

Abstract

For the last two decades, Environmental, Social, and Governance (ESG) ratings have emerged asa crucial measure for investors interested in sustainable investments. By aligning their values withESG factors, investors seek the flexibility to focus on individual ESG metrics while still leveragingpotential abnormal returns. The academic literature aims to explore the relationship betweenfinancial performance and the different categories of ESG scores. There is contradicting empiricalevidence on a positive or negative link. This thesis tries to contribute to the literature by exploringthe particular impact of different categories. I analyze financial data and ESG scores from RefinitivEikon for the European market from 2005 to 2021. I build three different strategies based onequally-weighted ESG-Categories portfolios with a cut-off of 10%. Abnormal returns aredetermined by the well-known Carhart (1997) four-factor model. The results suggest that LongShort ESG-Categories portfolios can outperform European benchmark Indexes with higher SharpeRatio and Cumulative returns. However, the study concludes that despite preliminary abnormalgains in Long-Short Human Rights and Product Responsibility categories portfolios, these findingsare not robust when increasing the cut-offs nor consistent after splitting into subperiods. Hence, investors should not expect to outperform the market using ESG-Categories portfolios.

Date of Award	9 May 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)