International Journal of Finance & Managerial Accounting

International Journal of Finance & Managerial Accounting

The Risk and Performance of ESG Portfolio Strategies in Global Financial Markets

Document Type : Review paper

Authors
Reza Mirghaffari 1
Ezatollah Abbasian 2
Seyed Mojtaba Mirlohi 3
1 Ph.D. Candidate and visiting researcher at Lund University, Department of Financial Management, Kish International Campus, University of Tehran, Kish, Iran,
2 Associate Prof., Department of Leadership and Human Capital, Faculty of Management, University of Tehran, Tehran, Iran,
3 Assistant Prof., Faculty of Industrial Engineering & Management, Shahrood University of Technology, Shahrood, Iran
10.30495/ijfma.2023.74525.2046
Abstract
The sustainable finance approach incorporates Environmental, Social, and Governance (ESG) criteria and has experienced remarkable growth in global financial markets. Recent research reveals that companies demonstrating strong ESG performance generally achieve better financial results and face reduced risks, regulatory fines, reputational damage, and supply chain disruptions. This study delves into the analysis of risk associated with sustainable investment portfolios comprising ESG-oriented companies. To investigate the impact of ESG screening on ESG portfolio’s risk we decompose the portfolios into equally-weighted strategy and value-weighted strategy to evaluate the effect of different levels of ESG portfolio’s risk in the US and EU market. Utilizing time-series regression models based on the Fama-French three-factor model (1993), we evaluate the performance of various ESG portfolios, encompassing both low and high-ESG-companies. In the second part of the study, we employ the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model to investigate the risk in different types of portfolios from 2004 to 2023 among European and American firms. Our findings indicate that the lower ESG portfolio tends to outperform the higher ESG portfolio in terms of returns, aligning with multiple reputable previous studies. Nonetheless, our study shows that during financial crises and global events, the high-ESG portfolio demonstrates lower risk than the lower-ESG portfolios.
Keywords
Environmental, Social, and Governance (ESG)
Socially Responsible Investing (SRI)
Sustainable/Green Finance
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