Return and Risk Management in Sustainable and Non-Sustainable Stock Portfolios

The aim of the present paper is to answer the question if value investing is a suitable management strategy for sustainable and/or non-sustainable equity portfolios. The research is based on the Western-European stock market using the STOXX Europe 600 index as a reference. To answer the research question, four stock portfolios were created (sustainable stocks/low value, sustainable stocks/high value, non-sustainable stocks/low value and non-sustainable stocks/high value), and their return and risk characteristics were analyzed. For the portfolios profitability was calculated as daily log returns. The portfolio-risks were measured by the daily-return volatilities derived from a GARCH (1,1) model. From a return perspective, no significant differences between value stocks and non-value stocks were found, neither in the sustainable sector nor in the non-sustainable sector. A different picture builds up in the risk analysis: Unsustainable low-value equities outperform the corresponding higher-valued stocks. Therefore, value investing in the low-ESG segment is an efficient strategy. In the high-ESG segment, low-value stocks are riskier than their higher-valued counterparts, so a value strategy should be avoided there. The research findings are highly relevant for asset managers who deal with stocks of varying sustainability levels in their work and seek to optimize their portfolios in terms of return and risk.