The added value and differentiation among ESG investment strategies in stock markets

Abstract

Abstract Environmental, social, and governance (ESG) investment strategies have garnered increasing attention in stock markets worldwide. The number of related funds and their money inflow, for instance, have more than doubled over the past 3 years. Yet, one fundamental question remains unanswered in the specialized literature: has there been any added value and statistical differentiation among ESG strategies in stock markets? We contribute to this discussion by assessing a range of ESG investment strategies across the globe. Daily closing prices of ESG best practices indices are collected for the period between 2011 and 2021, along with proxies for the market portfolio and the risk‐free rate. Empirical assessments are then conducted using classic and modern portfolio metrics as well as nonparametric tests. The results indicate a considerable degree of differentiation of the governance factor in every region studied, while the environmental and social agendas have remained considerably intertwined, with their theoretical portfolios showing similar risk–return profiles and high levels of correlation. The relative performance of ESG factors across regions has also varied considerably, with most developed economies prioritizing the environmental and social agenda for investments, and the governance factor providing better risk‐adjusted returns in emerging markets and in the Unites States. Implications and an agenda for future research are further discussed.