Alpha enhancement in global equity markets with ESG overlay on factor-based investment strategies

Subhransu S. Mohanty (), Odette Mohanty () and Mike Ivanof ()
Additional contact information
Subhransu S. Mohanty: SMART International Holdings, Inc.
Odette Mohanty: Bank Dhofar SAOG
Mike Ivanof: University of the Fraser Valley

Risk Management, 2021, vol. 23, issue 3, No 2, 213-242

Abstract: Abstract Studies show that companies with a strong Environment, Social and Governance (ESG) profile are more competitive than their peers, as they use resources, human capital and innovation more efficiently. High ESG-rated companies have lower exposure to systematic risk factors and low expected cost of capital, leading to higher valuations in a DCF model framework. They are typically more transparent, particularly with respect to their risk exposures, risk management and governance standards and have better long-term vision. The paper finds that higher Alpha can be harvested by restricting investment exposure to the ESG theme combined with various style characteristics, as they display low systematic and idiosyncratic tail risks. It shows that an ESG overlay on such factor-based strategies, particularly on ‘multi-factor’, ‘value’ and ‘low volatility’ in that order, reduces both systematic and idiosyncratic risks further. ESG overlay on ‘quality’ factor provides the highest return among ESG target indices, however, the underlying ‘quality’ factor provides even higher excess return. These findings can provide some insight on return enhancement to investors investing in the global equity markets.

Keywords: Global equity markets; Alpha enhancement; Market risk; Idiosyncratic tail risk; Factor risk; Environment; Social and Governance (ESG) (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://link.springer.com/10.1057/s41283-021-00075-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:risman:v:23:y:2021:i:3:d:10.1057_s41283-021-00075-6

Ordering information: This journal article can be ordered from
https://www.palgrave.com/gp/journal/41283

DOI: 10.1057/s41283-021-00075-6

Access Statistics for this article

Risk Management is currently edited by Igor Loncarski

More articles in Risk Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().