Open AccessESG Investing: The Use of ESG Ratings in a Smart Beta Strategy
Author(s) -
Balázs Stempler
Publication year - 2021
Publication title -
financial and economic review
Language(s) - English
Resource type - Journals
eISSN - 2415-928X
pISSN - 2415-9271
DOI - 10.33893/fer.20.2.91116
Subject(s) - passive management , investment strategy , business , explanatory power , index fund , weighting , predictive power , index (typography) , profit (economics) , actuarial science , economics , finance , institutional investor , corporate governance , computer science , open end fund , microeconomics , medicine , philosophy , epistemology , market liquidity , radiology , world wide web
ESG investing has recently been growing in popularity but the range of investment products available could still be widened. One possible approach is a combination of ESG ratings and the smart beta strategy that modifies index weighting based on a factor; thus, it contains elements from both active and passive fund management. The hypothetical funds created in this paper using this method achieved returns of over 50 per cent between 2015 and 2019, while the benchmark EURO STOXX 50 only provided a 19 per cent profit for investors during the five-year period. ESG ratings were found to be significant as a variable, suggesting that they can influence returns but other factors such as size or earnings growth have higher explanatory power. Also, while currently the possibilities for ESG investments are limited in Hungary, market players are starting to realise the potential of ESG, and with the suggested approach new investors could be attracted by funds