Academy of Marketing Studies Journal (Print ISSN: 1095-6298; Online ISSN: 1528-2678)


Exploratory review of ESG factor attribution to the Portfolio Return in Fama-French Factor Model Framework

Author(s): Sumit Kumar

Integrating ESG (Environment, Social and Governance) factors into the investment portfolio has become increasingly important in asset allocation and portfolio construction. We wanted to understand if the ESG factor integration positively contributes to the portfolio Alpha. We did a systematic review of more than 30 distinct & relevant literature which have used Fama-French factor model to validate the attribution of Portfolio Alpha to the ESG factors. Primary objective of this review paper is using the Fama-French Model Framework, determine the influence of ESG factor exposure on the Alpha of the equity investment portfolio. Examine the existence of cross-sectional bias and the possibility of modifying the Fama-French Model to account for any cross-sectional influence. Analysis of ESG factor attribution over a temporal axis using pre-UNSDG and post-UNSDG resolutions. We found that the alpha of a globally and regionally diversified portfolio cannot be linked to ESG factors or sustainable qualities. No relevant relationship exists between Portfolio Alpha and ESG Factor for a globally diversified portfolio. There is a positive link between Portfolio Alpha and ESG component, and this relationship holds for a regional portfolio whose asset allocation weight is mostly determined by the Developed Market portfolio. The risk-adjusted performance of a portfolio allocated to the Developed Market is positively benefited by the inclusion of ESG or sustainability factors. Regional bias in portfolio responses is typical and has been noted by previous investigations.

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