Practical Applications of E, S, or G: Analyzing Global ESG Performance

Abstract

In E, S, or G: Analyzing Global ESG Performance, in the Winter 2020 edition of The Journal of Impact and ESG Investing, Robert Bush, Jason Chen, and Eric Legunn, all of DWS Research Institute, investigate ESG (environmental, social, governance) investing within and across four markets: the United States; Europe, Australasia, and the Far East (EAFE); emerging markets (EMs); and Canada. They apply a three-step framework to assess the risk and return with ESG investing. First, they use linear regressions to quantify any ESG-related excess returns over regional benchmarks. Next, they apply a multifactor model to assess whether any identified alpha comes from value or size premia. Finally, in regions where ESG investing seems to outperform benchmarks, the authors parse the specific pillar’s (i.e., “E,” “S,” or “G”) contribution to that alpha.

They find statistically significant ESG-related alpha in EMs and Canada, largely unrelated to size and value factors. They note the pillar-sensitivity of alpha varies across regions: For example, the social pillar is a primary determinant in the United States, EAFE, and Canada. They also observe that the governance pillar, although historically most important to alpha generation in EMs, is declining in significance relative to the social and environmental pillars.

TOPICS: ESG investing, portfolio theory, equity portfolio management, behavioral financial, theory, in portfolio management