Sustainable investing : how to take into account ESGs criteria in order to value an asset ?

Abstract

The global aim of this thesis is to verify whether sustainability constitutes a relevant factor in capturing the variation of stock returns through a quantitative analysis. In order to check the validity of our hypothesis, which is that sustainability does indeed capture variation of stocks returns, the Fama and French Five-factor model has been adapted to a 6-factor model, adding a sustainability factor to the other validated factors, which are size, value, profitability and investment.

Sustainability is clearly a hot topic in present times, as a world trend has been increasing over the past year in a worldwide bench of different sectors, including finance. Here, we analyze the history of sustainability in finance, going through relating topics such as ESG, ethics, corporate social responsibility and responsible investments in finance, since they have also encountered an importance growth in business. Sustainability clearly plays a role in today’s business world, which is why it is worth to analyzing if it also plays a role in capturing stock return variations.

The data used in this paper comes from the Thompsons Reuters Database. The sample has been created from all the NYSE stocks having an ESG score, which had the key figure of sustainability level for a corporation and which also correspond to our sample filtration. The sample we examine extends from January 2003 to December 2017, and is therefore composed of 180 months of data.

The methodology used in our portfolio and factor construction is the same as that employed by Fama and French. The results consequently helped us compare whether sustainability of a corporation was worthy of consideration while investing in their stocks, for an investor who seeks to maximize his return for a given level of risk, or minimize his risk for a given level of return.

Our findings concluded that even if a difference of returns does exist between stocks considered sustainable and unsustainable, our sustainable factor could not significantly help to capture return variations. The results of this paper can, indeed, be ameliorated over time as sustainability is a growing trend which may well lead to more significant result in the future and also provide wider sample of data.