City Research Online

Abstract

The integration of sustainability factors into investment decision-making has become a fundamental aspect of contemporary asset management. The establishment of dedicated responsible investment teams and the appointment of Chief Sustainability Officers underscore the increasing prominence of environmental, social, and governance (ESG) considerations. This trend is driven by both strategic business imperatives and regulatory mandates, with proponents arguing that ESG integration enhances risk management and long-term investment opportunities. Empirical studies suggest that firms with strong ESG practices demonstrate superior risk mitigation capabilities, leading to reduced volatility and improved risk-adjusted returns. Additionally, high ESG-rated companies tend to experience lower financial risks, reduced capital costs, and enhanced operational performance, attracting socially conscious investors.

Regulatory frameworks, particularly in Europe, play a crucial role in driving ESG integration. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) mandates asset managers to disclose their ESG integration practices, aligning financial markets with broader sustainability objectives. Compliance with such regulations not only ensures adherence to legal requirements but also positions investors advantageously in a market increasingly valuing sustainability.

This study investigates the relationship between ESG integration and investment performance through two key analyses. The first chapter examines whether highly-rated ESG investments generate alpha, focusing on 297 open-ended equity funds in the European market from 2014 to 2021. Results indicate no consistent relationship between sustainability levels and equity factor exposure, though governance quality and carbon scores exhibit significant correlations with alpha generation. The second chapter assesses whether sustainability factors influence financial risks across global equity markets, including the World, World ex-US, and US indices. Findings suggest that sustainability scores have limited explanatory power for financial risks, with modest effects observed in higher-risk spectrums and during crisis periods, such as the COVID-19 pandemic. Ultimately, the study concludes that ESG integration should be primarily viewed as a mechanism for corporate responsibility and ethical investment rather than a definitive tool for risk reduction or alpha generation.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Finance Doctoral Theses

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