We introduce a factor approach to performance measurement of global ESG equity investments. We construct ESG pure factor portfolios (PFP) following Fama-MacBeth; then, applying FamaFrench (FF) spanning regressions that simultaneously test performance and the validity of adding new ESG factors to the FF 5-factor model. To address endogeneity, we use a GMM-IV estimator. Our ESG portfolios do not generate significant alphas during 2015-2019, corroborating the literature’s neutrality argument. We find no sufficient evidence for ESG factors to complement FF5. PFPs, nevertheless, may serve as ESG indices to quantify investment portfolio sustainability risks via performance attribution of the ESG factor tilt.
Naffa, H., & Fain, M. (2022). P A factor approach to the performance of ESG leaders and laggards. Finance Research Letters, 44, 102073.