ESG Investing: The Use of ESG Ratings in a Smart Beta Strategy

Balazs Stempler ()
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Balazs Stempler: Budapest University of Technology and Economics

Financial and Economic Review, 2021, vol. 20, issue 2, 91-116

Abstract: ESG investing has recently been growing in popularity but the range of investment products available could still be widened. One possible approach is a combination of ESG ratings and the smart beta strategy that modifies index weighting based on a factor; thus, it contains elements from both active and passive fund management. The hypothetical funds created in this paper using this method achieved returns of over 50 per cent between 2015 and 2019, while the benchmark EURO STOXX 50 only provided a 19 per cent profit for investors during the five-year period. ESG ratings were found to be significant as a variable, suggesting that they can influence returns but other factors such as size or earnings growth have higher explanatory power. Also, while currently the possibilities for ESG investments are limited in Hungary, market players are starting to realise the potential of ESG, and with the suggested approach new investors could be attracted by funds.

Keywords: ESG investing; fund management; stock indices; smart beta (search for similar items in EconPapers)
JEL-codes: G11 G15 G23 G24 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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