In today’s world, we are increasingly aware of the impact our actions have on the environment and society. This awareness has naturally extended into the financial sector, giving rise to the field of sustainable investing, which considers not only financial returns but also environmental, social, and governance aspects of companies. In this thesis, we describe the Markowitz model, the CAPM, and multifactor models, with a primary focus on the Fama-French three-factor and five-factor models. We present the application of the CAPM and Fama-French models for analyzing the returns of ESG portfolios. We explore the methodology for evaluating excess returns of long-short and Treynor-Black portfolios and introduce several approaches to aggregating ESG scores. The methods discussed include the equal weighted average, principal component analysis, Mahalanobis distance, voting average, single transferable vote, and optimized ESG score. We summarize the findings of a study that examines ESG ratings from six rating agencies and applies the aforementioned aggregation methods. We analyze the resulting excess returns and Sharpe ratios across different scores and portfolios.
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