Sustainable finance

: a look into impact-weighted accounting, ESG Scores and Alpha

Abstract

Sustainable finance plays a key role in the transition to a more responsible and low-carbon economy. Sustainable investments accounted for 35.5 trillion $ in 2020 and currently represent over 30% of global AUMs. This paper examines the alpha generation ability of two sustainable investment approaches, ESG- and Impact-investing, on the US and Developed equity markets during the 2012-2020 period. This is done by creating six ESG and Impact strategies and regressing excess returns against CAPM, Fama-French three and five factor models. The study's contribution to the sustainable finance field is two fold. First, ESG performance is proxied by Refinitiv ESG scores, while most academic research uses MSCI ESG ratings. Moreover, the thesis leverages the innovative Impact-Weighted Accounting methodology and Database -developed by Harvard - to assess firms' environmental impact through monetized measures. The results show that portfolios long high and short low ESG scores generate positive andsignificant alpha, while portfolios long low and short high environmental impact (i.e., damage) firms generate significant albeit negative alpha (only in US equities). Furthermore, the thesis finds no evidence of alpha generation in neither ESG nor Impact momentum strategies, as well as in the aggregate Developed equity market. The paper concludes that both Refinitiv ESGscores and Impact-Weighted measures can be useful for decision-making and portfolio construction, despite leading to significantly different results. The paper also provides practical implications to alpha-seeking investors, who can benefit from being long a high minus low ESG portfolio and short a low minus high environmental impact portfolio.

Date of Award	21 Oct 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Pieralberto Guarniero (Supervisor)