The Challenges of Sustainable Investing

Sammanfattning: Over the past decades, investment preferences towards portfolio construction have changed from focusing solely on profit maximization, into a combination of good financial perfor- mance as well as a responsible sustainability outcome. The purpose of this paper is three- fold: first, to investigate whether a sustainable portfolio based on a high environmental, social and governance (ESG) score contributes to positive returns or affects financial per- formance negatively. Secondly, the study analyzes whether sin stocks can lead to better financial performance or whether they can be included without compromising positive returns. Thirdly, the two factors are combined, by looking at whether sin stocks with high ESG scores perform better. Performance is primarily measured through the con- struction of a High-Minus-Low (HML) factor based on data from the Russell 3000 from 2009-01-01 through 2022-12-31. The factor is evaluated with Fama-French three-factor and five-factor models, as well as the Carhart four-factor model. The regressions demon- strate mixed results: portfolio construction conditioned on sustainable information may increase or decrease financial performance. The most significant positive results are ob- tained from the portfolios constructed based on ESG score of sin stocks. On the other hand, excluding all sin stocks from a portfolio significantly decreases portfolio perfor- mance. The evidence suggests that improved performance of sin stocks or any stocks with high ESG scores depend on how the portfolios are constructed and weighted. These results contribute to previous literature, as they confirm that sin stocks with a high ESG score outperform those with a low ESG score. Consequently, the latter could be excluded, without impacting financial returns.