Practical Applications of The Alpha, Beta, and Sigma of ESG: Better Beta, Additional Alpha?

Practical Applications Summary

In The Alpha, Beta, and Sigma of ESG: Better Beta, Additional Alpha?, from the September 2019 edition of The Journal of Portfolio Management, Brian Jacobsen, Wai Lee (both of Wells Fargo Asset Management), and Chao Ma (of Wells Fargo Investment Institute) examine whether the returns of ESG stocks differ from those of non-ESG stocks. They discover that after factor-adjusting the returns and risks of ESG and non-ESG stocks, portfolios of ESG stocks with positive alpha had return-to-risk features comparable to those of portfolios of non-ESG stocks with positive alpha. Portfolios of ESG stocks without statistically significant alpha displayed lower residual volatility than portfolios of non-ESG stocks without statistically significant alpha. The authors suggest that portfolio managers should focus on factor-adjusting their ESG portfolios to match non-ESG portfolios.