Seeking Financial Performance by avoiding ESG Risks : Sustainable investing in the world of equities

The present study investigates the integration of environmental, social, and gover-nance (ESG) scores constructed from company misconduct and incident data intothe systematic investment process for equities. These ESG scores are used to set upvarious ESG investment strategies: From best-in-class and exclusionary screeningto sustainability themed investing. The performance of these strategies is evaluatedin a realistic investment setting in the United States, European, and Swiss marketsand empirical results show that these scores, reflecting how companies are facingESG-related risk, are a key factor of distinguishing financial performance. On arisk-adjusted basis, portfolios consisting of top ESG scorers consistently outper-formed the benchmark whereas portfolios built from selecting bottom ESG scorersconsistently underperformed it across all investigated universes