Financial Analysts Journal 26 October 2020 Volume 77 Issue 1
Toward ESG Alpha: Analyzing ESG Exposures through a Factor Lens
Rather than trying to assess the likely success of idiosyncratic ESG stock selection, observing factor weightings in ESG funds could provide better insight into future performance.
Using data on 1,312 active US equity mutual funds with $3.9 trillion in assets under management, we analyzed the link between funds’ bottom-up, holdings-based environmental, social, and governance (ESG) scores and funds’ active returns, style factor loadings, and alphas. We found that funds with high ESG scores have profiles of factor loadings that are different from those of low-scoring ESG funds. In particular, funds with high environmental scores tend to have high quality and momentum factor loadings. In partitioning the ESG scores into components that are related to factors and idiosyncratic components, we found strong positive relationships between fund alphas and factor ESG scores.
About the Authors
Ananth Madhavan is managing director at BlackRock, Inc., San Francisco.
Aleksander Sobczyk is director at BlackRock, Inc., San Francisco.
Andrew Ang, PhD, is managing director at BlackRock, New York City.