THE RELATIONSHIP BETWEEN ESG & SOCIALLY RESPONSIBLE INVESTING AND ALPHA GENERATION IN THE LONG-RUN

The number of ethical investments have increased dramatically over the past few years due to the rising demands from investors. But do these investments really generate alpha over the long run? This paper seeks to examine the relationship between long-term alpha and investment vehicles with either an ESG or an SRI mandate. The analysis is broken down by both geography and by different time periods. In terms of geography, investments with either an ESG or SRI mandate are separately analyzed for both U.S. and Canada; and in terms of times periods, this paper examines historical monthly returns from both a longer time frame (12/31/2009 – 12/31/2018) and a medium time frame (12/31/2014 – 12/31/2018). The returns of the different investments are then benchmarked against the overall market index from the country where these investments are located. The alpha of these investments is calculated by using both the Capital Asset Pricing Model (CAPM) and a modified Carhart Multifactor Model. Our analysis indicates that there is no relationship between alpha and the socially responsible or ESG funds. The majority of time, these funds actually underperform the market. We present our findings that the ethical investments are less superior to a passive market index in this paper.