Scientific Beta

This document reports the results of a survey that Scientific Beta conducted to collect market participants’ views on its recent white paper ‘“Honey, I Shrunk the ESG Alpha”: Risk-Adjusting ESG Portfolio Returns’ (Bruno, Esakia and Goltz, 2021), which questions the popular belief that ESG strategies generate outperformance. The results of the survey show that most of the respondents agree that there is no sound evidence that ESG strategies offer any incremental value in terms of performance, and that most of the performance is captured by style factors.

Our recent white paper ‘“Honey, I Shrunk the ESG Alpha”: Risk-Adjusting ESG Portfolio Returns’ (Bruno, Esakia and Goltz, 2021) questions the popular belief that ESG strategies generate outperformance. The paper shows that the performance of popular ESG strategies may appear attractive when looking at simple returns or CAPM alphas. However, most of this performance is due to equity style factors that can be mechanically constructed from balance sheet information. Such ESG strategies also have significant sector biases. When adjusting for industry and factor exposures, the ESG alpha disappears. We also show that ESG strategies do not provide protection against downside risk. In addition, their performance may have been overestimated because many studies that claim to find positive ESG alpha concentrate on a recent period that has been characterised by increasing investor attention to ESG.

This article reports results of a survey that Scientific Beta conducted to collect market participants’ views on this white paper.

The survey begins by evaluating the level of agreement on the main finding of the paper, namely the absence of ESG alpha. The results of the survey show that most of the respondents agree that there is no sound evidence that ESG strategies offer any incremental value in terms of performance, and that most of the performance is captured by style factors. Respondents were also asked what may have motivated the omission of factor and sector exposure in the studies that we criticise. While most of the respondents did not express a specific opinion on this, the second most popular answer is that this omission may have been driven by commercial interests. The survey also tries to address a possible reason why investors might disagree with the findings of the paper, namely the specificity of our sample. Indeed, the results of the paper are based on the ESG scores of a single rating provider over a short period, and this may call into question the general validity of the results. Despite that, only 22% of the respondents believe that the sample-specificity of the results undermines the overall validity of our results, and only 17% of them believes that our finding of absence of outperformance is surprising.

In the conclusions of our paper, we argue that the absence of alpha is not a reason to abandon ESG strategies, because they can offer non-pecuniary benefits and protection against ESG related risks, such as climate risks. Most of the respondents agree with this view and believe that ESG strategies should indeed help investors to achieve objectives other than alpha. This view of market participants strengthens the case for using ESG investing not as another hunting ground for alpha, but as a means to address investors’ non-pecuniary and risk-hedging objectives.