The role of ESG in investments Empirical evidence from US Banking and Energy sector

Absztrakt (kivonat)

In my study I test the effect of the ESG score incorporation into investments in the banking and energy sector through the most common ESG investing styles. I test these investment strategies through a portfolio approach and also use the Fama-MacBeth regression simultaneously. Therefore, compelling a more comprehensive analysis. To better account for investor needs, I not only focus my analysis on the returns, but statistically test the standard deviation and downside standard deviation as two measures of risk. I also evaluate the performance through three different risk-adjusted return ratios (Sharpe, Sortino and Information ratio). Looking for structural or systemic differences I divide the data into sub-periods at the Paris Agreement, and into period of recessions. The most interesting result is for the Environment portfolio in the banking sector, which consistently outperforms the sector average in terms of risk-adjusted returns, standard deviation and in some cases in raw return as well. The results are robust for equal and value weighting, different time periods, market conditions and testing methods. It is especially strong in time of recessions. The positive screening investing style in the banking sector also generally outperforms the sector average in terms of risk-adjusted return. However, the results in the energy sector are not so clear. There is no clear good strategy, the results are sensitive for weighting and for time. The positive screening style shows some positive results and the negative screening technics also have some promising results in the energy sector. In conclusion my results support the incorporation of ESG into investment decisions for better risk-adjusted performance in both the banking and the energy sector. With a stronger performance in the banking sector for the Environmental factor.