Is ESG a systematic risk factor for US equity mutual funds?

Ick Jin

Journal of Sustainable Finance & Investment, 2018, vol. 8, issue 1, 72-93

Abstract: On the outperformance of responsible investing (RI) which incorporates environmental, social, and governance (ESG) into investment decisions, the empirical evidence to date is inconsistent from the viewpoint of ex-post performance. This paper tries to explain the nature of return differential between RI and conventional investing within the well-known risk-return paradigm. From the viewpoint of ex-ante equity risk premium, the five factor model of Fama and French [2015. “A Five-factor Asset Pricing Model.” Journal of Financial Economics 116: 1–22] combined with a ESG-related factor applies to returns on 1,425 US open-end equity funds for the period from April 2009 to December 2016. Empirical findings include that US open-end equity funds tend to hedge the ESG-related systematic risk, and that the exposure to ESG-related systematic risk is significantly priced in the market. The result implies that RI provides the downside protection against ESG-related systematic risk which is not reduced even through extensive diversification.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jsustf:v:8:y:2018:i:1:p:72-93

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DOI: 10.1080/20430795.2017.1395251

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