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Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

PloS one, 2020-12, Vol.15 (12), p.e0244225-e0244225 [Peer Reviewed Journal]

COPYRIGHT 2020 Public Library of Science ;COPYRIGHT 2020 Public Library of Science ;2020 Naffa, Fain. This is an open access article distributed under the terms of the Creative Commons Attribution License: http://creativecommons.org/licenses/by/4.0/ (the “License”), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;2020 Naffa, Fain 2020 Naffa, Fain ;ISSN: 1932-6203 ;EISSN: 1932-6203 ;DOI: 10.1371/journal.pone.0244225 ;PMID: 33351834

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Title:
Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology
Author: Naffa, Helena ; Fain, Máté
Trinidad Segovia, J E.
Subjects: Accounting ; Aging ; Computer security ; Costs ; Disruptive innovation ; Earth Sciences ; Ecology and Environmental Sciences ; Economic aspects ; Economic Development ; Efficient markets ; Energy efficiency ; Engineering and Technology ; Evaluation ; Food security ; Investment strategy ; Investments - economics ; Investments - standards ; Investments - trends ; Management ; Medicine and Health Sciences ; Method of moments ; Millennials ; Models, Economic ; Performance measurement ; Portfolio investments ; Portfolio management ; Portfolios ; Regression analysis ; Risk analysis ; Robotics ; Social investing ; Social Sciences ; Stock-exchange ; Stocks ; Sustainable development ; Urbanization ; Water scarcity
Is Part Of: PloS one, 2020-12, Vol.15 (12), p.e0244225-e0244225
Description: ESG factors are becoming mainstream in portfolio investment strategies, attracting increasing fund inflows from investors who are aligning their investment values to Sustainable Development Goals (SDG) declared by the United Nations Principles for Responsible Investments. Do investors sacrifice return for pursuing ESG-aligned megatrend goals? The study analyses the risk-adjusted financial performance of ESG-themed megatrend investment strategies in global equity markets. The analysis covers nine themes for the period 2015-2019: environmental megatrends covering energy efficiency, food security, and water scarcity; social megatrends covering ageing, millennials, and urbanisation; governance megatrends covered by cybersecurity, disruptive technologies, and robotics. We construct megatrend factor portfolios based on signalling theory and formulate a novel measure for stock megatrend exposure (MTE), based on the relative fund flows into the corresponding thematic ETFs. We apply pure factor portfolios methodology based on constrained WLS cross-sectional regressions to calculate Fama-French factor returns. Time-series regression rests on the generalised method of moments estimator (GMM) that uses robust distance instruments. Our findings show that each environmental megatrend, as well as the disruptive technologies megatrend, yielded positive and significant alphas relative to the passive strategy, although this outperformance becomes statistically insignificant in the Fama-French 5-factor model context. The important result is that most of the megatrend factor portfolios yielded significant non-negative alphas; which supports our assumption that megatrend investing strategy promotes SDGs while not sacrificing returns, even when accounting for transaction costs up to 50bps/annum. Higher transaction costs, as is the case for some of these ETFs with expense ratios reaching 80-100bps, may be an indication of two things: ESG-themed megatrend investors were willing to sacrifice ca. 30-50bps of annual return to remain aligned with sustainability targets, or that expense ratio may well decline in the future.
Publisher: United States: Public Library of Science
Language: English
Identifier: ISSN: 1932-6203
EISSN: 1932-6203
DOI: 10.1371/journal.pone.0244225
PMID: 33351834
Source: DOAJ Directory of Open Access Journals
PLoS
GFMER Free Medical Journals
MEDLINE
PubMed Central
Coronavirus Research Database
ProQuest Central

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Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

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