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Is ESG Investing Counterproductive?

By |November 20th, 2023|ESG, Research Insights, Basilico and Johnsen, Academic Research Insight, Corporate Governance|

The article introduces a concept called "impact elasticity," which measures how a firm's environmental impact changes in response to shifts in its cost of capital (the "E" in "ESG"). It finds that the dominant sustainable investing strategy, which favors green firms and punishes brown firms by altering their cost of capital, can be counterproductive.

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Value versus Values in ESG Investing

By |October 30th, 2023|ESG, Research Insights, Basilico and Johnsen, Academic Research Insight|

The relationship between financial markets and ESG investing is obscured by the lack of clarity regarding motivations for investing in ESG strategies. Is the motive to align the investor’s values with the ESG theme? Or is the ESG term a misnomer for a set of stocks that are systematically undervalued, for some reason as a function of its ESG characteristics? 

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Are ESG strategies more effective for societal impact or performance?

By |October 24th, 2022|ESG, Research Insights, Basilico and Johnsen, Academic Research Insight|

In this article, we examine the research addressing the question of to what extent, if any, ESG strategies improve investment performance on a risk-adjusted basis, or if they are more effectively used for the societal impact they potentially have.

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ESG Ratings how do they Compare Across Data Providers?

By |September 7th, 2022|ESG, Research Insights, Basilico and Johnsen, Academic Research Insight|

Investments aligned with environmental, social, and governance (ESG) principles are rapidly growing globally. In the exchange traded fund (ETF) industry, this gives rise to the power of ESG rating firms that have the influence to direct capital flows into ETFs tracking the indexes. This article examines the issues of substantial ESG rating divergence across rating firms, the impact on investors’ choices, and the influence on the ETF industry. The divergence appears to be the greatest in social and governance components, and is often qualitative in nature. The author found that certain economic sectors are more prone to ESG rating divergence than others. She presents a case study about two ESG ETFs that are viewed quite differently under various rating lenses, and offers suggestions to investors, advisors, and analysts on how to research ESG ETFs, given the major rating divergence. The article concludes with ways the ETF industry could improve its practices collectively to better serve investors with clarity and to sustain the growth of ESG impact investments.

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The Expected Returns to ESG-Excluded Stocks

By |July 28th, 2022|ESG, Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight|

What are the consequences of widespread ESG-based portfolio exclusions on the expected returns of firms subject to exclusion? We consider two possible theoretical explanations. 1) Short-term price pressure around the exclusions leading to correction of mispricing going forward. 2) Long term changes in required returns. We use the exclusions of Norwegian Government Pension Fund Global (GPFG -`The Oil Fund') to investigate. GPFG is the world's largest SWF, and its ESG decisions are used as a model for many institutional investors. We construct various portfolios representing the GPFG exclusions. We find that these portfolios have significant superior performance (alpha) relative to a Fama-French five factor model. The sheer magnitude of these excess returns (5\% in annual terms) leads us to conclude that short-term price pressure can not be the only explanation for our results, the excluded firms expected returns must be higher in the longer term.

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Are Quant Approaches Best for Sustainable (ESG) Investing?

By |March 21st, 2022|ESG, Factor Investing, Research Insights, Basilico and Johnsen, Academic Research Insight|

After 40 years or so, quantitative investing has evolved into a thriving practice.  A major feature of the quantitative approach involves developing underlying numerical models and testing them on a historical (data) record and then forecasting where alpha may be embedded into the prices of a set of stocks.  Whether you agree or disagree with this approach, it is difficult to deny that with the advanced state of data access and computational skill, “quants will win the day in ESG investing”.   Such is the premise of this article and happily, it is accompanied by a compelling argument.

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ESG Investing: Dissecting Green Returns

By |December 13th, 2021|ESG, Research Insights, Basilico and Johnsen, Academic Research Insight, Value Investing Research, Momentum Investing Research|

In theory green stocks should have lower expected returns, this however, is not what we've seen. So the question is what has caused the outperformance of green stocks? And has that outperformance cost value investors their returns?

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