RT Journal Article
SR Electronic
T1 Outperformance through Investing in ESG in Need
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 18
OP 26
DO 10.3905/jii.2018.9.2.018
VO 9
IS 2
A1 Jason Hsu
A1 Xiaoyang Liu
A1 Keren Shen
A1 Vivek Viswanathan
A1 Yanxiang Zhao
YR 2018
UL https://pm-research.com/content/9/2/18.abstract
AB To maximize their effectiveness, environmental, social, and governance (ESG) strategies should target those ESG firms that are most capital constrained. Inherently, this involves seeking ESG firms that have irrationally high costs of capital and thus high expected return. We replicate results that find returns among ESG firms that are similar to those among non-ESG firms. In addition, we find that sorting stocks based on cost of equity capital generates significant positive return for both ESG and non-ESG firms. Investing in an ESG in Need index, which contains only high-ESG companies and tilts toward firms with high cost of capital, thus generates both higher social value and better return than investing in traditional capitalization-weighted ESG indexes.TOPICS: ESG investing, security analysis and valuation, mutual funds/passive investing/indexing, performance measurement