ESG Investing in Public Equity Markets

Delighted to have presented on ESG investing to 2nd year MBA students at Columbia Business School on March 17/2021, as part of their course “ESG Investing in Public Equity Markets”. The presentation was based on my Journal of Investing (2015) paper on using ESG factors in active management for portfolio construction. It explores the predictive power of ESG on returns, volatility and risk adjusted returns of individual securities, and on tail risk, portfolio risk and risk-adjusted return using Portfolio Opportunity Distributions (POD). The main results were that higher return stocks almost always had higher average ESG rating, and stocks with the maximum return that active managers try to identify were always from the non-lower-tail (ESG) group. There was a strong negative correlation between ESG ratings and stock volatility, and this relationship was stronger when market volatility was higher and therefore higher need for diversification benefits. The return profile of random portfolios created from (a) the full sample and (b) a smaller universe created by deleting lowest-rated ESG companies as a tail risk, indicated that deleting worst ESG rated stocks did not necessarily impose opportunity costs and, in fact, tended to be value additive for investors in terms of portfolios with higher average and maximum return. This implies that asset managers can enhance their stock-picking and portfolio construction ability by using ESG information and even more so by excluding the worst ESG stocks.