The risk-adjusted return potential of integrating ESG strategies into emerging market equities

Abstract

This study purposed to quantify the performance potential of integrating ESG research within emerging market investment strategies, as well as the potential for risk diversification through investments in emerging markets. This study evaluated literature on investing in both emerging markets and integrating environmental, social, and governance (ESG) research-based strategies. This study examines real data on ESG and non-ESG integrated emerging market indices, both region-specific and country-specific. This examination includes measuring historical returns, beta, the Sharpe ratio, the Sortino ratio, the Conditional Value at Risk, skewness, and the Omega ratio for ESG and non-ESG integrated emerging market indices. Paired t-test analysis is incorporated in the measurement of the data. The results of the study indicate significant outperformance based on ESG integration. The implications of this study indicate that integrating ESG emerging market equities into institutional portfolios could provide institutional investors the opportunity for higher returns and lower downside risk than non-ESG equity investments.