Portfolios with high and low ESG scores and their performance during different market phases

Abstract

In recent years the ESG (Environmental, Social, Governance) theme has gained relevance as society gained a renewed interest in several areas of it. This change has also affected the way in which portfolios, but more in general, investments are made. In this study we start by providing a general overview of the ESG field, meaning: an assessment of the different types of sustainable investing, a review of the role of rating agencies in relation to ESG investing and the contrast between sustainable investing and sin stocks. After reviewing the different methods of ESG portfolio construction we than built eight different portfolios each one containing 50 different stocks from the S&P 500 index: one with low Environmental score, one with high Environmental score, one with low Social score, one with high Social score, one with low Governance score, one with high Governance score, one with low ESG score and one with high ESG score. We finally review the different types of instruments that can be used to assess systematic risk and by using a quantile regression, we determine how our high E,S,G, and ESG portfolios behave in respect to low E,S,G and ESG ones during different market phases.