Momentum and ESG integration

: a strategy for sustainable returns

Abstract

This dissertation investigates the integration of environmental, social and governmental (ESG) factors into a momentum strategy, intending to understand their impact on financial performance. To this end, a sample of common shares traded in the United States between January 2010 and September 2024 was used. ESG data was obtained from the LSEG Data & Analytics platform and stock returns were extracted from Datastream database. The study employs a zero-cost strategy, focusing on stocks simultaneously ranked in the best 10% in terms of returns and the best 30% regarding ESG scores, against those in the worst 10% and 30% in the same categories. The research concludes that the integration of sustainable metrics does not significantly improve the performance of the momentum strategy, instead, it increases idiosyncratic risk due to less diversification in stock selection rather than characteristics related to ESG inclusion. The results suggest that investors should not expect to obtain abnormal returns when trading momentum portfolios differentiated by ESG characteristics. Although the sustainable complement does not improve the traditional momentum strategy's overall performance, it reveals additional explanatory power of factors such as HML (value) and RMW (profitability), which become pertinent in determining returns. These conclusions underscore the complexity of sustainable incorporation and suggest the need to explore its long-term implications in detail, including broader market research and alternative ESG approaches.

Date of Award	30 Jan 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	António Baldaque da Silva (Supervisor)