An Analysis of Global ESG Performance | ETF Trends

Environmental, social, and governance based investment strategies have gained in popularity this year, but some still question the viability of the theme and its ability to enhance a diversified investment portfolio beyond traditional allocations.

In a recent research paper, E,S, or G – Analyzing Global ESG Performance, DWS strategists led by Robert Bush proposed a framework for analyzing the risk and return impact of ESG investing across regional equity markets through passive index exposure via the MSCI ESG Leaders methodology. The strategists sought to discover: 1) whether an ESG investment has generated meaningful, statistically significant alpha in the single-index model, 2) if any such alpha does exist, whether it is simply explained by known risk premia, 3) in regions where ESG has empirically added meaningful alpha, which of the three pillars, E, S, or G, has been the main determinant of this alpha, and whether the sensitivity to each of the three pillars has changed over time, and 4) the extent to which any ESG alphas are correlated across regions.

“We conclude through our three-step framework that 1) statistically significant empirical alpha exists in EM and Canada, 2) size and values factors do not explain much of this empirical alpha, 3) historical sensitivity to pillars is largely weighted toward governance, and 4) finally that regional MSCI ESG Leaders alphas are largely uncorrelated despite utilizing a consistent methodology,” the strategists said.

The findings add on to a growing body of evidence from academic research and historical data that reveal ESG investments are more than just a feel-good strategy to placate investors whom are seeking ways to invest where their heart is. These ESG strategies may help expand investment options available and potentially enhance the risk-adjusted returns of a diversified portfolio.

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