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ESG Investing: The Use of ESG Ratings in a Smart Beta Strategy

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  • Balazs Stempler

    (Budapest University of Technology and Economics)

Abstract

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.

Suggested Citation

  • Balazs Stempler, 2021. "ESG Investing: The Use of ESG Ratings in a Smart Beta Strategy," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(2), pages 91-116.
    • Handle: RePEc:mnb:finrev:v:20:y:2021:i:2:p:91-116
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    References listed on IDEAS

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    Cited by:

    1. Emilia Nemeth-Durko & Anita Hegedus, 2021. "Climate Change in the Capital Markets: A Study of Actively Managed Green Bond Funds," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(4), pages 38-64..

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    More about this item

    Keywords

    ESG investing; fund management; stock indices; smart beta;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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