Researchers Helena Naffa and Máté Fain published a new paper entitled “Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology” in the scientific journal PLOS One, which ranks in the top ten among multidisciplinary journals each year. Below is a summary of the paper authored by the researchers of the Department of Finance covering responsible investments and sustainable finance.
In their paper, Helena Naffa and Máté Fain examined the impact of investing in environmental, social and innovative megatrends over the past nearly half a decade, from 2015 to 2019, a topic which already dominates public discourse as well as economic policy, and is likely to have defining impact on our daily lives in the future. They find that equity investments along various ESG themes have already benefited investors during the pre-COVID-19.
In recent years, environmental and social challenges have taken centre-stage in both the press and economic policy-making, the Paris Convention, which recently celebrated its five-year birthday, or the United Nations Sustainable Development Goals (SDGs) have become wide-spread themes. Climate emergency became the Oxford Dictionary’s word of the year in 2019.
Global stock markets are also keeping pace with these changes. The ESG metrics of companies are increasingly critical for investment decision-makers. ESG is an acronym that combines environmental, social, and corporate governance aspects of businesses capturing the non-financial characteristics of firms that may well have material impact on investment returns.
The Global Sustainable Investment Alliance (GSIA) reported its latest statistics on the global dominance of sustainable investments: by 2018, every third dollar was invested in the financial markets in a sustainable form, in line with the ESG approach. While only 21 per cent of assets under management were ESG-compliant in 2012, the recent surge in ESG investments meant growth exceeded 50 per cent over the six years. The popularity of ESG investing has since grown significantly and is becoming mainstream.
Based on the GSIA classification, negative screening remains the most popular ESG-based investment strategy. At the same time, thematic investments benefitted from the largest growth of fund inflows in recent years: from 2016 to 2018, thematic funds quadrupled their holdings, now exceeding one trillion USD in assets. The authors’ strategy is driven by global megatrends, hence the name megatrend-based investments. This paper’s research is unique in filling the void in the finance literature covering ESG themed megatrend investments; results have implications on sustainability financing and investments both in academia and for practitioners alike.
The research studied nine megatrends: energy efficiency, water scarcity and food safety formed the environmental megatrend; aging society, the millennium generation, and urbanization covered the social megatrend; and, disruptive technologies, cybersecurity, and robotics represented the technological megatrend.
To assess the performance of each megatrend, pure factor portfolios were constructed while eliminating secondary factors (e.g. size, value, geographical or industrial scope) and accounting for the problem of endogeneity. The performance of the pure-factor megatrend portfolios was measured against a benchmark represented by the MSCI All Country World Index, a widely used proxy for global equity markets.
Results show that all nine ESG-themed portfolios beat the market. The most outstanding performance came from the water scarcity, urbanization and disruptive technologies. Performance accounted for both risks as well as transaction costs. Results showed that an annual cost rate of 50 basis points (half a per cent) for thematic funds was justifiable. ESG risks can be diversified and no returns are sacrificed by sustainability-aligned investors, supporting the “doing well while doing good” concept.
The authors will also present their research results during the Corvinus Research Week, 13/01/2021, from 17:20 CET. Attendance is open to the public.