The Performance of ESG Integration Strategies. Development of an ESG Integration Methodology for EU Equity Portfolios

Inhaltsverzeichnis (Table of Contents)

• 1 Introduction
  • 1.1 Problem Statement
  • 1.2 Research Question
  • 1.3 Structure of the Thesis
• 2 Sustainable and Responsible Investing
  • 2.1 Definition and Development of SRI
  • 2.2 Motivation for SRI
  • 2.3 Regulation of SRI
  • 2.4 Measuring Corporate Sustainability
    • 2.4.1 ESG Ratings
    • 2.4.2 Sustainability Reporting Frameworks
  • 2.5 SRI Strategies
    • 2.5.1 Engagement
    • 2.5.2 Negative Screening
    • 2.5.3 Positive Screening
    • 2.5.4 Best-in-Class Screening
    • 2.5.5 ESG Integration
• 3 Theoretical Basis for Proposed Quantitative ESG Integration Strategy
  • 3.1 Investment Signal Generation
    • 3.1.1 Linear Models
    • 3.1.2 Goodness-of-Fit and Hypothesis Testing
    • 3.1.3 Panel Data Structures
    • 3.1.4 Fixed Effects
  • 3.2 Portfolio Performance Measures
    • 3.2.1 Modern Portfolio Theory and SRI
    • 3.2.2 Return
    • 3.2.3 Capital Asset Pricing Model
    • 3.2.4 Arbitrage Pricing Theory
    • 3.2.5 Fama-French 3-Factor Model
    • 3.2.6 Carhart 4-Factor Model
    • 3.2.7 Fama-French 5-Factor Model
• 4 Review of Empirical Studies
  • 4.1 Khan, Serafeim, and Yoon (2016)
  • 4.2 Henriksson, Livnat, Pfeifer, and Stumpp (2018)
  • 4.3 Other Studies
• 5 Methodology of the Quantitative ESG Integration Strategy for E.U. Equity Portfolios
  • 5.1 Materiality Matrix
  • 5.2 Sustainability Scores
  • 5.3 Sample construction
  • 5.4 Investment Signal Generation

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis aims to develop a practical sustainable and responsible investment (SRI) strategy for integrating financially material environmental, social, and governance (ESG) factors into European Union (EU) equity portfolios. It investigates whether portfolios constructed using companies with high and low investments in material sustainability factors achieve positive alphas, analyzing the impact of both material and immaterial ESG factors on risk-adjusted returns. The study also performs a robustness check using sub-periods and sub-samples.

• Development of a quantitative ESG integration strategy for EU equity portfolios.
• Analysis of the relationship between investment in material ESG factors and portfolio alpha.
• Examination of the impact of material and immaterial ESG factors on risk-adjusted returns.
• Comparison of findings with existing literature, particularly U.S.-focused studies.
• Robustness check of results across different time periods and samples.

Zusammenfassung der Kapitel (Chapter Summaries)

1 Introduction: This introductory chapter establishes the context of the thesis by highlighting the increasing pressure on EU investors to incorporate sustainability considerations into investment decisions. It introduces the concept of SRI and its potential for superior returns, while acknowledging criticisms regarding the transparency and quality of ESG data. The chapter clearly defines the research question – whether portfolios constructed from companies with varying levels of investment in material ESG factors achieve different risk-adjusted returns – and outlines the structure of the thesis.

2 Sustainable and Responsible Investing: This chapter provides a comprehensive overview of SRI, tracing its definition and evolution. It explores the motivations behind SRI adoption, examining regulatory influences and the various methods used to measure corporate sustainability, including ESG ratings and reporting frameworks. Crucially, it details different SRI strategies, including engagement, negative and positive screening, best-in-class screening, and ESG integration, providing the theoretical foundation for the chosen methodology in the subsequent chapters.

3 Theoretical Basis for Proposed Quantitative ESG Integration Strategy: This chapter lays out the theoretical framework underpinning the thesis's quantitative ESG integration approach. It delves into investment signal generation, exploring linear models, goodness-of-fit tests, panel data structures, and fixed effects. The chapter also examines various portfolio performance measures, including modern portfolio theory, the Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT), and the Fama-French three-, four-, and five-factor models, all of which are crucial for evaluating the performance of the constructed portfolios.

4 Review of Empirical Studies: This chapter reviews existing empirical studies on ESG integration strategies, focusing on the methodologies and findings of key papers such as those by Khan, Serafeim, and Yoon (2016) and Henriksson, Livnat, Pfeifer, and Stumpp (2018). It critically analyzes their different approaches to ESG integration, portfolio construction, and the interpretation of empirical results. This contextualizes the current study's methodology and findings within the broader academic landscape.

5 Methodology of the Quantitative ESG Integration Strategy for E.U. Equity Portfolios: This chapter details the methodology employed in the thesis. It explains the construction of a materiality matrix using Refinitiv ESG data and the Sustainable Accounting Standards Board's (SASB) framework, detailing the process of connecting these data sources and generating sustainability scores. The chapter also outlines the sample construction process, including considerations of sector, industry, country, and temporal distribution, and describes the investment signal generation process, which involves applying orthogonalization models and conducting regressor analysis.

Schlüsselwörter (Keywords)

ESG integration, sustainable and responsible investing (SRI), EU equity portfolios, financial materiality, portfolio performance, alpha, Fama-French model, Refinitiv ESG data, SASB materiality classification, risk-adjusted returns, quantitative investment strategy.

Häufig gestellte Fragen

What is the main objective of the thesis?

The thesis aims to develop a practical sustainable and responsible investment (SRI) strategy for integrating financially material environmental, social, and governance (ESG) factors into European Union (EU) equity portfolios. It investigates whether portfolios constructed using companies with high and low investments in material sustainability factors achieve positive alphas.

What is the scope of the study in terms of geographical focus?

The study focuses on European Union (EU) equity portfolios.

What are the key factors being analyzed in relation to portfolio performance?

The study analyzes the impact of both material and immaterial ESG factors on risk-adjusted returns. It examines the relationship between investment in material ESG factors and portfolio alpha.

What ESG data sources and frameworks are used?

The study uses Refinitiv ESG data and the Sustainable Accounting Standards Board's (SASB) framework to construct a materiality matrix and generate sustainability scores.

What models are used to assess portfolio performance?

The study utilizes modern portfolio theory, the Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT), and the Fama-French three-, four-, and five-factor models to evaluate portfolio performance.

What SRI strategies are discussed in the thesis?

The thesis details different SRI strategies, including engagement, negative and positive screening, best-in-class screening, and ESG integration.

What is the purpose of the chapter reviewing empirical studies?

The chapter reviews existing empirical studies on ESG integration strategies to contextualize the current study's methodology and findings within the broader academic landscape, particularly highlighting studies by Khan, Serafeim, and Yoon (2016) and Henriksson, Livnat, Pfeifer, and Stumpp (2018).

What does the "materiality matrix" refer to?

The materiality matrix is constructed using Refinitiv ESG data and the Sustainable Accounting Standards Board's (SASB) framework. It helps determine which ESG factors are financially material for different industries.

What kind of robustness checks are performed in the study?

The study performs a robustness check using sub-periods and sub-samples to ensure the reliability of the findings.

What is the central research question of the thesis?

The research question is whether portfolios constructed from companies with varying levels of investment in material ESG factors achieve different risk-adjusted returns.

What are the keywords associated with this study?

The keywords are: ESG integration, sustainable and responsible investing (SRI), EU equity portfolios, financial materiality, portfolio performance, alpha, Fama-French model, Refinitiv ESG data, SASB materiality classification, risk-adjusted returns, quantitative investment strategy.