ESG investing: Do better ESG scores generate superior investment returns?

The importance of ESG funds is undeniable, having accumulated $71 billion of net inflows globally between April and June 2020 and with assets under management exceeding $1 trillion. However, the jury is still out on whether ESG investing generates abnormal returns. A review of the literature suggests that materiality is arguably a critical aspect that likely affects the ability of ESG scores to predict future stock performance. This project will explore a new alternative construction of ESG scores that incorporates materiality into Sustainalytics raw scores. We will examine whether investment portfolios constructed based on materiality-adjusted ESG scores can generate superior returns over holding horizons from 1-12 months. Our analysis will inform fund managers of the usefulness of this new investment signal that potentially improves portfolio performance and strengthens its ESG footprint at the same time.