Esg: Cómo Incorporarlo En Gestión Para Pasar Del Marketing a La Realidad- Un Estudio Econométrico Factorial

COLEGIO UNIVERSITARIO DE ESTUDIOS FINANCIEROS

MÁSTER UNIVERSITARIO EN INSTITUCIONES Y MERCADOS

FINANCIEROS (INTERNATIONAL FINANCE)

ESG: CÓMO INCORPORARLO EN GESTIÓN PARA PASAR DEL MARKETING A LA REALIDAD- UN ESTUDIO ECONOMÉTRICO FACTORIAL

Realizado por:

D. Guillermo Villalba Cuesta

Dirigido por:

D. Javier Alonso Jiménez (CEO Credit Suisse S.G.I.I.C.)

CUNEF (Colegio Universitario de Estudios Financieros)

MADRID, a 11 de septiembre del 2020

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I would like to thank Javier Alonso for giving me the chance to experience money management first-hand at Credit Suisse. It has proved invaluable for writing this dissertation. Thank you.

This dissertation is dedicated to my mother, I hope to make you proud.

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Abstract

Each decade has an investment theme that, with the power of hindsight, shines over the rest of the investable landscape. In the 90’s it was tech; companies like Apple or Microsoft, fully mature after their 80’s IPO’s, came into their own. In the 00’s it was commodities; both hard and soft commodities could not keep up with rapidly rising demand. Finally, in the 10’s, it was big tech; software transforming how we work, play and live our lives in general.

Dominant investment themes make themselves known in everyone’s lives, those of engineers and teachers alike. Standing at the dawn of a new decade, we must therefore think what the 20’s have in store for society as a whole.

We live in a world that is ever more responsive and less afraid to speak up. Climate change, promoting gender equality or multiple stakeholder theory are issues that we all demand our companies face up to. ESG investment products are born to channel these concerns. Following rapid growth in interest in ESG over the past 2 years, the Covid-19 epidemic will only propel this trend forward.

The purpose of this dissertation is to study ESG stock market returns using an extension of the Fama & French model to determine if this form of investing can outperform the market. I find that ESG is not a source of alpha but rather it contributes to surplus returns through factors that can’t be modelled using traditional methods, ESG being hidden in momentum and market ß. I posit that ESG might just be the investment theme of the 20’s.

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Contents

1. Introduction

2. Literature Review

2.1. ESG Stock Market Returns

3. Methodology

4. Results

5. Discussion

5.1. Evaluation

6. Conclusion

7. Bibliography

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1. Introduction

Investors traditionally pursue pure financial returns (a percentage on top of the nominal invested) as a measure of the outcome of their investments. If we go further, we can construct a risk-return relationship where the return is maximised for a certain level of risk or, similarly, the risk is minimised for an anticipated level of return (commonly seen in the hedge fund industry). In other words, one wants to maximise one’s Sharpe ratio given an acceptable standard deviation, one that lies within a prespecified range (W. F. Sharpe, 1964)1.

However, Environmental, Social and Governance (ESG) investing, an investment strategy that takes into account both financial performance and non-financial dimensions of corporate performance, has increasingly gained worldwide investor attention, aiming for returns beyond just those of a financial nature. The purpose of this dissertation is to analyse if indeed investors are sacrificing financial (stock market) returns to pursue this ESG penchant, or if ESG can actually provide alpha.

I will commence by outlining who the market participants for ESG investment assets are, where they are located and provide an understanding of the size of this investment universe. First, the majority of these investments are made by institutional investors such as pension funds and asset managers. Only 26% were attributable to individual investors at the beginning of 2016. This is a reason why paying attention to the likes of Vanguard or Fidelity’s investment philosophy is paramount, any mention of ESG can change inflows dramatically.

Next, we can ascertain that sustainability in the institutional investment procedure is more prevalent in Europe than in the US. Sustainability is admittedly a broad term and I shall define its different nuances for the sake of investments below. For now however, the following graph still serves to illustrate regional differences:

1 Capital Asset Prices: a theory of market equilibrium under conditions of risk (William F. Sharpe, 1964).

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Figure 1:

Source: Morgan Stanley Research2

Attitudes towards sustainable investing on either side of the pond are different. However, the US, according to Morgan Stanley research2, may slowly start to bridge the gap (Figure 2). The more important message though is the fact that ESG is becoming a must and that those asset managers that have a limited ESG offering will fall behind.

Figure 2:

Source: Morgan Stanley Research2

In 20182, over 30 USD trillion in assets were managed with some form of sustainability approach- the current S&P 500 market cap is 27 USD trillion. Further, in the graph below we

2 Morgan Stanley Research (2020): “Embedding Sustainability into Valuation: Navigating the ESG Investment Trend.”

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can see that the number of ESG funds has more than doubled over the past decade and that the assets under management (AUM) in these funds have grown at 10.4% CAGR.

Figure 3:

Source: UNCTAD (2019)3

Coronavirus has also not halted the trend. During March (the market trough), net outflows as a percentage of starting AUM were lower for ESG funds than for the broader market, whilst inflows quickly recovered to pre-pandemic peaks2.

Figure 4:

Source: Morgan Stanley Research2

3 Leveraging the Potential of ESG ETFs for Sustainable Development (2019).

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One should also note the huge inflows into ESG funds in 2019, higher than those into the top 100 non-ESG funds. I believe that this is one of the key points that contribute to the high momentum that ESG investment products are experiencing. Another explanation behind ESG momentum is the regulatory framework that is ever stricter with compliance. Regulation will also establish more transparent disclosure of ESG issues and eventually make it mandatory as is filing a 10-K in the United States.

In addition, the Covid-19 crisis has brought social and governance elements to the plate and these have gained a lot of traction with investors. In particular, there has been an added focus on how companies treat their employees, suppliers, customers and society as a whole, as investors incorporate the treatment of stakeholders into their investment process. For example, companies that started work from home (WFH) earlier received ample praise and also admiration not for their foresight but for caring more about their employees. Further, it is unlikely that we will return to the pre-Covid age, announcements such as that of Jack Dorsey, Twitter CEO, that all employees can WFH forever, are likely to set the new normal and those companies that don’t accommodate these changes are likely to be penalised in the stock market. The following graph illustrates this recent trend as well as the broader 5 year upwards trajectory:

Figure 5:

Source: Morgan Stanley Research2

The economic recovery post-Covid will also be one of government and supranational focus on ESG. For example, the European Commission Covid-19 recovery plan, for which the Commission has issued its own bonds as a means of funding, will be mainly allocated to green projects or efforts of digitalisation. Further, in December 2019, the Commission pledged to make Europe a carbon neutral continent by 2050. Indeed, ESG has gone from a microeconomic topic to one that is heavily macroeconomic too.

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Next, funds with a sustainability component are found across all asset classes but with a particular weighting towards equity at present. As of July 2020, 69% of ESG assets under management (AUM) are in equity funds2 with 19% in fixed income. However, fixed income is growing faster, with fixed income AUM growing at 32% year-on-year compared to 28% year- on-year for equities.

It is also important to understand how ESG is incorporated into the investment process and the nuances between buzz words and phrases such as sustainability or being socially responsible. First, ESG investing “screens” for environmental, social and governance factors, screening relying on measurable time-series metrics. Of the many companies that screen for ESG, Bloomberg and Sustainalytics are the most widely used. Individual metrics are weighed according to their perceived importance, reaching a final score for the “E”, the “S” and the “G” and “ESG” as a whole for the company in question. One then establishes a point threshold above which one is happy to invest in the company. This is “Socially Responsible Investing (SRI)” (see Figure 6). This can also be referred to as positive screening.

However, this point system is only one way of screening, one can also screen on what I would call a negative basis- negative qualities or events (think VW’s emissions scandal or BP’s leek in the Caribbean), automatically disqualifying a company. “Sin industries” can also be disqualified automatically. This is the “SRI strict form”, it conducts the negative screening (on industry) and then incorporates ESG (scoring). As illustration, fossil fuels have been a more recent exclusion, with the gambling, arms or sex industries being excluded earlier. The S&P, FTSE and MSCI all rolled out fossil-fuel free indexes between April 2014 and August 2015, allowing passive retail investors to more easily exclude the sector. With the proliferation of different passive investment vehicles such as ETFs, these developments will prove crucial in augmenting total ESG AUM.

Furthermore, “impact investing” does not integrate ESG, it simply seeks resulting impact. “No harm” investing screens industries and excludes the stocks from the controversial industries. In contrast to that, “sin stock” investing is performed to achieve higher expected returns by positively screening controversial industries and choosing companies within them. Lastly, “responsible sin” investing follows sin industries and invests in those stocks based on ESG characteristics- picking out the best from the worst.

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Figure 6:

Industry ESG Investor's Resulting screening integration values impact Responsible investing no yes no no SRI no yes yes no SRI strict form yes yes yes no Impact investing no no yes yes No harm yes no yes no Sin stocks yes no no no Responsible sin yes yes no no

Source: Own collation

I now believe that it is pertinent to disclose the well accepted Bloomberg ESG metric into its individual components as an illustration of what underpins ESG scores.

Firstly, on the environmental side, Bloomberg takes several measures into account, from greenhouse gas emissions (tons) per one million dollars in revenues to the waste/revenue ratio. These are typically efficiency measures and don’t control for the different types of industry, a coal burning cement factory will most likely have much worse scores than say a wind farm.

Secondly, the social parameters to be included are a priori slightly more up for discussion as one could in practice incorporate a wide range of them in screening processes. Nonetheless, Bloomberg uses 4 as the basis of screening for the “S”. These are; i) women in management/total women in the workforce, ii) women employees (%), iii) employees unionised (%) and iv) lost time incident rate (number of incidents resulting in lost time from work, per 20,000 hours or per 100 employees, assuming employees work 40 hours per week and 50 weeks per year).

Lastly, (corporate) governance is screened by Bloomberg using 5 measures. These are; i) independent directors as a percentage of total membership (%), ii) percentage of board members that are women (%), iii) director average age (lower is better), iv) board meeting attendance and v) board size (lower is better).

The following diagram illustrates how FTSE Russel, responsible for the FTSE 100 and Russell 200 Indexes, sets the framework for evaluating its coverage companies on an ESG basis:

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Figure 7:

Source: ftserussell.com4

Beyond what measures are taken into account for ESG considerations, a judgement on the type of activity undertaken is also made. Some activities are blacklisted, others live in a grey area and some have societal use but are often conducted in ESG unfriendly ways ie. payday loans.

4 https://www.ftserussell.com

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Figure 8:

Source: Citi Research5

As alluded to, the rise of ESG investing is also documented by the attention paid to several newly constructed market indices6. Among the ones most commonly watched are the S&P ESG Indices, the DJ Sustainability World Composite or the MSCI World ESG Index. Another example of the increasing importance of ESG characteristics is the emergence of loans where the interest rate is tied with the sustainability performance of the project as measured by ESG criteria.

The emergence of green bonds over the past decade is also noteworthy, fixed income instruments that channel funding to certain environmentally friendly projects at a theoretical lower yield. This lower yield is achieved by having more demand for the bond ceteris paribus as investors like to do good as well as make money. However, this theoretical argument may not be the case as the creditworthiness of “green” projects may be lower than for alternative “dirtier” ones. Thus, until we see fiscal brakes, as we saw with highway construction in Spain in the boom years, investors may not flock into green bonds as much as thought and hence will not push yields lower. Nonetheless, green bonds are by far the largest type of ESG bonds with 687 USD billion outstanding, followed by sustainability bonds at 99 USD billion and social

5 Citi Research (2020): “What happens to companies that get on the wrong side of the ESG debate.”

6 Socially Responsible Investing and Portfolio Performance (M Pokorna, 2017).

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bonds at 90 USD billion, funds earmarked for sustainability and social reform projects respectively.

The latest current example of the growing ESG importance is ESG integration by the Swiss Re Group. Swiss Re integrates ESG into its investment processes since the start of 2017. The company is the 1st one in the re-insurance industry to shift their benchmarks to the alternative ESG ones, suggesting that considering ESG is not only an addition to its processes but it is now an integral part of them.

Nonetheless, most investors are not willing to sacrifice returns when investing in ESG companies, funds or other asset classes. Hence, it is important to analyse the historical time series of prominent ESG indices and funds, how have they performed? Indeed, the performance of sustainability funds has been robust and resilient. ESG indices also continue to outperform the broader market, with MSCI SRI Indices outperforming their respective country indices by 5-19% since 2015 and between 3-6% year-to-date (YTD).

Figure 9:

Source: Morgan Stanley Research2

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Figure 10:

Source: Morgan Stanley Research2

Finally, ESG is a multifaceted beast. It not only involves what a company does but also how the company does it and behaves more generally. Indeed, high ESG companies should have to offset the negative externalities that they inevitably produce. Nonetheless, it is primarily down to the government to set up policies involving taxation or emissions trading schemes to curb negative externalities in the first place. The government will have a vital role to play in ESG matters in the present decade and beyond, setting the regulatory framework and standards that companies should adhere to. Financial regulators will also be important in setting the disclosure of ESG company data, thereby making ESG disclosure a necessity and helping to discipline the market on these matters.

2. Literature Review

The first study on our relationship of study was by Spicer (1978)7, who found that “for a sample of firms drawn from the pulp and paper industry, companies with better pollution control records tend to have higher profitability”. However, Chen and Metcalf (1980)8 showed that Spicer’s results were contaminated by a variety of methodological problems, including inappropriate statistical tests or failure to control for size (a factor à la Fama & French). Nonetheless, Spicer’s study focuses attention on the primary question at hand- whether environmental expenditures should be viewed as a cost or as an investment.

7 Market Risk, Accounting Data and Companies’ Pollution Control Records (B. H. Spicer, 1978).

8 The Relationship between Pollution Control Record and Financial Indicators Revisited (K. H. Chen, R. W. Metcalf, 1980).

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A different group of researchers instead looked at market data, simulating different investment portfolios. For example, Cohen, Fenn and Naimon (1995)9 found that a sample of theoretical investment portfolios of low pollution firms provided better returns than did similar portfolios of high pollution firms. Hamilton (1995)10 found that firms suffered stock market losses after particularly negative Toxic Release Inventory (TRI) announcements.

Indeed, having laid out the individual metrics behind ESG investing, the way to make sustainable investing mainstream is to show how ESG integration adds value, if it indeed leads to higher financial returns at all. Hamilton et al. (1993)11 developed three hypotheses for the relative performance of ESG/socially responsible investments (SRI) in relation to conventional investments. The first hypothesis is that there is no difference between the risk-adjusted performance of SRI and conventional investments- the socially responsible component of an investment is not priced by the market. The second hypothesis is that the expected return of SRI is lower than conventional investments- SRI investors contribute to increase the value of the company by expecting and accepting a lower return in relation to conventional investments. The third hypothesis is that the expected return of SRI surpasses that of conventional investments because conventional investors constantly underestimate the probability and impact of the release of negative public information about companies that are not socially responsible.

In general terms, the studies conducted over the past 40 years are a mixed bag. However, even if the results are mixed, some hypotheses can be raised. Creating trusting relationships with primary stakeholders by addressing their legitimate needs and concerns creates reputational wealth and relational capital for the firm and ultimately can lead to improved corporate valuation (Hoepner et al., 2016)12. The second line of reasoning is based on the good management hypothesis (Ferrell et al., 2016)13, which suggests that high levels of corporate social responsibility (CSR) practices are a signal of supremely competent and trustworthy corporate managers. The latter is the concept that there is some sort of signalling effect, if you are able to take care of your not for profit concerns, you must also be good at turning a profit.

Beyond individual hypotheses on CSR specifically, there are three major ways in how sustainability through the integration of ESG issues can lead to a competitive advantage

9 Environmental and Financial Performance: Are They Related? (Cohen, Fenn and Naimon, 1995).

10 Testing for environmental racism: Prejudice, profits, political power? (Hamilton, 1995).

11 Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds, Financial Analysts Journal, Vol. 49, N. 6, pp. 62-66. (Hamilton, S., H. Jo and M. Statman, 1993).

12 The Effects of Corporate and Country Sustainability Characteristics on the Cost of Debt: An International Investigation (Andreas Hoepner, Ioannis Oikonomou, Bert Scholtens, and Michael Schröder, 2014).

13 Socially Responsible Firms (A. Ferrell, H. Liang, L. Renneboog).

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(Revelli and Viviani, 2015)14. First, being “sustainable” implies a certain level of risk reduction through having good risk management policies. The result is lower volatility of a company’s cash flows as the impact of tail events are mitigated. Project managers will always tell you that projects never go to plan and hence accounting for risks, risk management, is paramount.

Second, if the firm makes greener or more efficient use of its resources, improving its “E” scores, it will be more economically efficient, reducing its cost base in an organic way. Ceteris paribus, everything else the same, margins should improve.

Third, having a good ESG track record will help with recruitment of human capital as well as reduce churn rates; indeed, a satisfying workplace with ethical principles can foster job embeddedness and ensure that talented employees stay with the firm. These values and preferences are especially present amongst millennials, nearly 90% of millennials are interested in sustainable investing, versus 72% of the total investor population, according to a report by Morgan Stanley's Institute for Sustainable Investing2. Similarly, Millennials and GenZ’ers are more concerned about climate change as can be ascertained in Figure 11:

Figure 11:

Source: Morgan Stanley Research2

Furthermore, recent studies have also shown a negative relationship between ESG performance and a company’s WACC (Sharfman & Fernando, 2007)15, leading to a higher company valuation using valuation techniques like the discounted cash flow (DCF). This is different to previous links between ESG and company performance/valuation, it affects the denominator instead of the numerator in the present valued cash flows that make up a DCF model. The environmental-economic performance relationship has been dominated by the view that improvements in economic performance stem from better resource utilisation.

14 Financial performance of socially responsible investing (SRI): what have we learned? A meta-analysis (Revelli & Viviani, 2015).

15 Environmental Risk Management and the Cost of Capital (M. P. Sharfman & C. S. Fernando, 2007).

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However, firms also benefit from improved environmental risk management through a reduction in their cost of equity capital, a shift from (expensive) equity to (cheaper) debt financing and higher tax shields associated with the ability to add debt.

This last sentence can be explained by a chain of reasoning. First, as a firm makes strategic investments that reduce emissions and pollution, it mitigates its risk of litigation either from governmental regulators or from non-governmental stakeholders. This reduces the Beta (ß) in the cost of equity (ke) formula as the risk perception of the company from an investment standpoint is reduced and hence ke is reduced. This makes equity capital cheaper. Furthermore, this is also the case because green investors will only invest in firms with good environmental risk management while non-green investors are indifferent about environmental risk management. Therefore, firms with poor environmental risk management will have a higher cost of equity capital in relative terms because fewer people will buy their shares. In addition, if firms strategically manage their environmental risks, it is possible that this activity will gain them legitimacy even with non-green institutional investors and increase the investment by institutional investors in the firm’s shares. As widely documented in the literature, institutional investors actively monitor the performance of the firms they invest in and such monitoring can lead to a variety of benefits for the firm- a higher concentration of institutional owners will benefit the company through a lower ke as they are more informed investment agents.

Lastly, the firms’ cost of debt (kd) is also reduced through the above line of reasoning. By subsequently increasing the firm’s debt capacity, the amount of income the firm can protect from corporate taxation also goes up, this tax shield adding implicit value to the company.

Figure 12:

Source: Revelli & Viviani, 201514

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Nonetheless, there are arguments that point in the opposite direction, socially responsible investment (ESG integration + investor’s values) may not be the panacea of moral high ground that we may think. One of the main arguments is based on Milton Friedman’s view of the social responsibility of business (Friedman, 1970)16. This critique states that if it is not possible for investors to achieve desirable financial returns with SRI (direct way), they could still follow their ethical values by investing into diversified portfolios and then use part of the financial returns to invest in projects which represent their values (indirect way). Hence, whether strategies based on companies’ good CSR affect the financial performance of portfolios positively, neutrally, or negatively, it is more important for the investor to choose between the direct and indirect option, the direct option not being the only one.

Quoting the great Milton Friedman, “what does it mean to say that the corporate executive has a social responsibility in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers”. Indeed, the corporate executive is just an employee. By pursuing these alternative objectives, “the corporate executive would be spending someone else's money for a general social interest”. Therefore, unless we can prove that these alternative objectives create excess stock market returns, ESG, if anything, exacerbates the principal-agent problem.

In addition, traditional portfolio theory suggests that any SRI screen reduces returns, since it restricts an investor’s choice set; mathematically, a constrained optimisation is never better than an unconstrained optimisation.

2.1. ESG Stock Market Returns

Having gone over both sides of the coin, I posit that we shouldn’t care as much about how the link between ESG and financial returns works but instead study if ESG integration can lead to above market returns in the first place.

Hamilton, Jo and Statman (1993)17 study the typically seen screen of the 80’s and 90’s of avoiding South African stocks. They find alpha to not be positively statistically significant in all but one of the mutual funds that screen away South African stocks using Jensen’s alpha:

� − � = � + �� − � + � where i is a specific mutual fund, rf is the risk free rate and rm is the market return per period.

16 The Social Responsibility of Business is to Increase its Profits (M. Friedman, 1970).

17 Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds (Hamilton, Jo and Statman, 1993).

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Similarly, Statman and Glushkov (2008)18 studied the screens that were popular in the 00’s, namely excluding tobacco companies as the most popular screen followed by ones that excluded companies associated with alcohol, gambling and weapons. They concluded that the socially responsible investor did better than the market between 1992 and 2007 but by shunning/screening away these sin stocks, they could have done even better. Indeed, going from SRI to SRI strict form (Figure 6) may have its disadvantages.

In a similar light, Grossman and Sharpe (1986)19 compared the actual performance of the NYSE with the performance of a value-weighted NYSE portfolio that excluded companies with operations in South Africa. The authors find that the risk-adjusted South Africa-free portfolio outperformed the NYSE portfolio by 0.187% per year over the 1960-83 period. Grossman and Sharpe also found that the outperformance of the South Africa-free portfolio can be attributed entirely to the fact that companies in the portfolio are smaller on average than the NYSE companies. This brings us on to the issue of omitted variable bias that I will now discuss.

Running regressions to compare sets of portfolios can be dangerous if one doesn’t account for potential biases due to omitted variables (omitted variable bias). In the above example, the South Africa-free portfolio may have been composed of smaller companies, having some sort of activity in a far-removed country like South Africa indicates a relatively big market capitalisation. Further, American companies in South Africa are typically involved in mining, an industry that requires sufficient scale to function effectively and efficiently. Indeed, the literature points towards smaller companies having higher returns due to their illiquidity and lower or more sparce coverage. Thus, not accounting for size and not including it in the regression(s) is a mistake that can scale the coefficient on other regressors up or down. For example, if we have a true relationship given by:

� = � + �� + �� + � and we omit z from the relationship, like omitting size in the Grossman and Sharpe South Africa paper, we have a completely different relationship. To see this, we suppose the relationship between x and z is given by:

� = � + �� + �

Then, by substituting this second equation into the first, we obtain the following:

� = (� + ��) + (� + ��)� + (� + ��)

18 The Wages of Social Responsibility (Statman and Glushkov, 2008).

19 Financial Implications of South Africa Divestment (Grossman and Sharpe, 1986).

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If this last regression were to be conducted, we would find that the coefficient on x is actually � + �� and not b, what it should be if it were not contaminated by the omitted variable z. Hence, we should look towards more recent models that account for other factors, beyond just the risk of the market of the seminal capital asset pricing model (CAPM). The renowned Eugene Fama and Kenneth French20 built on the CAPM by working on previous author observations. Banz (1981)21, found that size added to the explanation of the cross- section of average returns provided by the market ß’s in his study. Further, Stattman (1980)22 established that average returns on US stocks are positively related to the ratio of a firm’s book value of common equity, BE, to its market value, ME. In other words, surplus average returns are negatively related to respective price-to-book ratios. Fama & French therefore built on this research to test (for statistical significance) the following regression that will be explained below:

� = �� + �� − � + �(���) + �(���) + �

The first part of the equation is the standard CAPM with market risk. SMB and HML are proxies for size and value respectively. These factors are constructed using 6 value-weighted portfolios formed on size and book-to-market (inverse of price-to-book).

SMB (small minus big) is the average return on the three small portfolios minus the average return on the three big portfolios23:

1 1 ��� = (����� ����� + ����� ������� + ����� �����ℎ) − (��� ����� 3 3 + ��� ������� + ��� �����ℎ)

The intuition behind this is that you go long on small caps and short on large caps and obtain how much excess return can be attributed to this. Once you have a time series for SMB, you can then regress it to see if changes, when the SMB value goes up or down, can explain stock market returns.

HML (high minus low) is the average return on the two value portfolios minus the average return on the two growth portfolios:

1 1 ��� = (����� ����� + ��� �����) − (����� �����ℎ + ��� �����ℎ) 2 2

20 The Cross-Section of Expected Stock Returns (Fama & French, 1992).

21 The relationship between return and market value of common stocks (Banz, 1981).

22 Book values and stock returns (Stattman, 1980).

23 https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

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The intuition behind this is that you go long on the value stocks (low price to book ratio) and short on the growth stocks (high price-to-book ratio). Fama & French find that in fact this creates stylistically significant positive returns. Therefore, including HML variations over time in the regression will provide explanatory power to our quest of finding what causes surplus market returns.

However, other factors have also been studied in the literature. Famously, Carhart24 provided a widely used fourth factor, momentum, in his “On Persistence in Mutual Fund Performance”. Momentum is the idea that hot hands will continue to do well and that stocks that are doing badly will continue in this trajectory.

Fama and French now keep track of momentum on their website23 and calculate it (US momentum) using six value weighted portfolios formed on size and prior returns (returns from t-12 to t-2). These are divided into two high prior return portfolios, two medium prior return portfolios and two low prior return portfolios. One then takes the two high and two return portfolios, the breakpoint being the 30th and 70th NYSE percentiles. Henceforth momentum is the average return on the two high prior return portfolios minus the average return on the two low prior return portfolios:

1 1 ��� = (����� ���ℎ + ��� ���ℎ) − (����� ��� + ��� ���) 2 2

I therefore use the Carhart momentum extension to augment the Fama & French model and make it richer:

� = �� + �� − � + �(���) + �(���) + �(���) + �

3. Methodology

As outlined in numerous other academic papers, I too compare the returns of a high ESG portfolio against those of a low ESG portfolio- in this case high vs low for the S&P 100 and DAX 30. I have chosen these indexes because they may show relative differences that could prove interesting for drawing conclusions.

I have used ESG data taken from the Bloomberg Terminal to segment both the S&P 100 and the DAX 30 into high and low ESG groups (we therefore end up with 4 separate groups). This data is sourced by Bloomberg from Sustainalytics25, the leading ESG research and scoring company on the market. The score series that I use is the only one available on Bloomberg

24 On Persistence in Mutual Fund Performance (Carhart, 1997). 25 https://www.sustainalytics.com

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 22

and is called “Overall Industry Relative ESG performance”. To better understand what the score/rating in this series encapsulates, I got in contact with the Sustainalytics team, getting the following answer:

“The ESG Rating focuses primarily on capturing the level of management in key ESG areas through the lens of indicators determined according to their relevancy within that particular industry. This is reflected through scores from 0 to 100, with a higher score signifying a better management of these key ESG areas.”

It is important to note that the above tells us that industry is controlled for, hence, if you are an oil company or burn coal, you can still do well in this scoring system as “ESG areas,…, determined according to their relevancy within that particular industry”. Controlling for industry is key, if not one would end up with a certain kind of sector in the high ESG portfolio and another in the low. This would be comparing apples with pears. However, it may still be easier to comply with ESG concerns or even go above and beyond in certain sectors.

Furthermore, according to the information that I was given, the score is in fact a percentile score, a percentile score relative to the 1600 companies that Sustainalytics covers for Bloomberg. Even though I only use a sub-group of these 1600 companies, it should not pose a statistical issue as the relative difference/order between companies is importantly unchanged in my samples.

I take the top and bottom 10% of companies in both the S&P 100 and DAX 30 according to their monthly ESG score. This corresponds to two groups of 10 companies for the S&P 100 and two groups of three for the DAX 30. I then use these to form my two portfolios; i) long the S&P 100 high ESG group and short the S&P 100 low ESG group and ii) long the DAX 30 high ESG group and short the DAX 30 low ESG group. I then have to reconstitute the portfolio on a monthly basis.

I believe that this segmentation level (10%-level) is relevant as it really isolates those that are doing very well in ESG terms and those that are clear underperformers. If we simply divided stocks into the top 50% and bottom 50%, one would get a lot of noise, especially around the middle. In fact, I observe remarkable consistency in the 10%-level groups, something that I believe adds robustness to my results.

Portfolios run for 76 periods, from February 2014 to May 2020. For the S&P 100, we have the following high ESG group (in score order):

Figure 13:

5/2020 4/2020 3/2020 2/2020 Accenture PLC Accenture PLC Intel Corp Intel Corp Intel Corp Intel Corp Accenture PLC Microsoft Corp International Business Machines International Business Machines Corp Corp International Business Machines Corp Accenture PLC International Business Machines salesforce.com Inc salesforce.com Inc salesforce.com Inc Corp

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 23

Microsoft Corp Microsoft Corp Goldman Sachs Group Inc/The salesforce.com Inc Goldman Sachs Group Inc/The Goldman Sachs Group Inc/The Microsoft Corp Goldman Sachs Group Inc/The Home Depot Inc/The Home Depot Inc/The Merck & Co Inc Merck & Co Inc Merck & Co Inc Merck & Co Inc Home Depot Inc/The Home Depot Inc/The Cisco Systems Inc Mastercard Inc Adobe Inc PepsiCo Inc Mastercard Inc Adobe Inc NVIDIA Corp Cisco Systems Inc 1/2020 12/2019 11/2019 10/2019 Microsoft Corp Microsoft Corp Microsoft Corp Intel Corp Intel Corp Intel Corp Intel Corp Microsoft Corp International Business Machines Accenture PLC Accenture PLC Accenture PLC Corp International Business Machines Corp International Business Machines Corp International Business Machines Corp Accenture PLC Goldman Sachs Group Inc/The Verizon Communications Inc Goldman Sachs Group Inc/The Cisco Systems Inc salesforce.com Inc Goldman Sachs Group Inc/The salesforce.com Inc salesforce.com Inc Verizon Communications Inc Starbucks Corp PepsiCo Inc ConocoPhillips Cisco Systems Inc salesforce.com Inc Starbucks Corp Adobe Inc PepsiCo Inc Cisco Systems Inc Cisco Systems Inc NVIDIA Corp Home Depot Inc/The PepsiCo Inc Morgan Stanley Starbucks Corp 9/2019 8/2019 7/2019 6/2019 Intel Corp Intel Corp Intel Corp Intel Corp Microsoft Corp Microsoft Corp Microsoft Corp Microsoft Corp International Business Machines International Business Machines Corp International Business Machines Corp International Business Machines Corp Corp Accenture PLC Accenture PLC Accenture PLC Home Depot Inc/The Home Depot Inc/The Home Depot Inc/The Home Depot Inc/The Accenture PLC salesforce.com Inc salesforce.com Inc Starbucks Corp Cisco Systems Inc Starbucks Corp Cisco Systems Inc salesforce.com Inc Johnson & Johnson Cisco Systems Inc Adobe Inc Cisco Systems Inc Starbucks Corp Adobe Inc Starbucks Corp Adobe Inc salesforce.com Inc Mastercard Inc NVIDIA Corp NVIDIA Corp Adobe Inc 5/2019 4/2019 3/2019 2/2019 Intel Corp Intel Corp Intel Corp Intel Corp Microsoft Corp Microsoft Corp International Business Machines Corp Accenture PLC International Business Machines International Business Machines Corp International Business Machines Corp Microsoft Corp Corp Home Depot Inc/The Cisco Systems Inc Home Depot Inc/The Johnson & Johnson Starbucks Corp Home Depot Inc/The Johnson & Johnson Home Depot Inc/The Accenture PLC Accenture PLC Cisco Systems Inc Microsoft Corp Johnson & Johnson Johnson & Johnson Accenture PLC Cisco Systems Inc Cisco Systems Inc salesforce.com Inc Starbucks Corp Merck & Co Inc salesforce.com Inc Starbucks Corp salesforce.com Inc Starbucks Corp NVIDIA Corp NVIDIA Corp Merck & Co Inc salesforce.com Inc 1/2019 12/2018 11/2018 10/2018 Intel Corp Intel Corp Intel Corp Intel Corp Accenture PLC Accenture PLC Accenture PLC Accenture PLC International Business Machines International Business Machines Corp International Business Machines Corp International Business Machines Corp Corp Home Depot Inc/The Home Depot Inc/The Home Depot Inc/The Microsoft Corp

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 24

Microsoft Corp Microsoft Corp Microsoft Corp Home Depot Inc/The Johnson & Johnson Johnson & Johnson Johnson & Johnson salesforce.com Inc salesforce.com Inc salesforce.com Inc salesforce.com Inc Johnson & Johnson Cisco Systems Inc Cisco Systems Inc Cisco Systems Inc Cisco Systems Inc Oracle Corp Oracle Corp Oracle Corp Biogen Inc Starbucks Corp Starbucks Corp Merck & Co Inc Oracle Corp 9/2018 8/2018 7/2018 6/2018 Intel Corp Intel Corp Intel Corp Intel Corp International Business Machines Accenture PLC International Business Machines Corp International Business Machines Corp Corp International Business Machines Corp Microsoft Corp Accenture PLC Accenture PLC Microsoft Corp Accenture PLC Microsoft Corp Johnson & Johnson salesforce.com Inc salesforce.com Inc Home Depot Inc/The Microsoft Corp Johnson & Johnson Johnson & Johnson Cisco Systems Inc salesforce.com Inc Home Depot Inc/The Home Depot Inc/The salesforce.com Inc Biogen Inc Cisco Systems Inc Cisco Systems Inc Johnson & Johnson Cisco Systems Inc Biogen Inc Biogen Inc Biogen Inc Oracle Corp Oracle Corp Oracle Corp Oracle Corp Starbucks Corp 5/2018 4/2018 3/2018 2/2018 International Business Machines International Business Machines Corp International Business Machines Corp International Business Machines Corp Corp Accenture PLC Accenture PLC Accenture PLC Intel Corp Intel Corp Intel Corp Intel Corp Accenture PLC Microsoft Corp Microsoft Corp Microsoft Corp Biogen Inc salesforce.com Inc PepsiCo Inc Biogen Inc Microsoft Corp Biogen Inc Biogen Inc PepsiCo Inc PepsiCo Inc Cisco Systems Inc Cisco Systems Inc Oracle Corp Oracle Corp PepsiCo Inc salesforce.com Inc Cisco Systems Inc Cisco Systems Inc Oracle Corp Oracle Corp Starbucks Corp Johnson & Johnson Starbucks Corp Starbucks Corp Adobe Inc Starbucks Corp 1/2018 12/2017 11/2017 10/2017 International Business Machines Corp International Business Machines Corp Intel Corp Intel Corp International Business Machines Intel Corp Intel Corp International Business Machines Corp Corp Accenture PLC Accenture PLC Accenture PLC Accenture PLC Biogen Inc Biogen Inc Biogen Inc Biogen Inc Microsoft Corp Microsoft Corp Microsoft Corp Microsoft Corp PepsiCo Inc PepsiCo Inc PepsiCo Inc Oracle Corp Oracle Corp Oracle Corp Cisco Systems Inc Cisco Systems Inc Cisco Systems Inc Cisco Systems Inc Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Oracle Corp PepsiCo Inc Starbucks Corp Starbucks Corp Starbucks Corp Starbucks Corp 9/2017 8/2017 7/2017 6/2017 Intel Corp Intel Corp Intel Corp Accenture PLC International Business Machines Corp International Business Machines Corp International Business Machines Corp Johnson & Johnson International Business Machines Accenture PLC Biogen Inc Johnson & Johnson Corp Biogen Inc Accenture PLC Accenture PLC Biogen Inc

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 25

Microsoft Corp Cisco Systems Inc Biogen Inc Intel Corp Johnson & Johnson Microsoft Corp Cisco Systems Inc Microsoft Corp PepsiCo Inc Johnson & Johnson Bristol-Myers Squibb Co Bristol-Myers Squibb Co Cisco Systems Inc Oracle Corp Microsoft Corp Cisco Systems Inc Oracle Corp Starbucks Corp Oracle Corp Oracle Corp Starbucks Corp Adobe Inc Starbucks Corp Starbucks Corp 5/2017 4/2017 3/2017 2/2017 Accenture PLC Accenture PLC Intel Corp Intel Corp Adobe Inc Adobe Inc Accenture PLC Accenture PLC Intel Corp Intel Corp Adobe Inc Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Adobe Inc International Business Machines Corp International Business Machines Corp International Business Machines Corp Biogen Inc International Business Machines Biogen Inc Biogen Inc Biogen Inc Corp Microsoft Corp Microsoft Corp Microsoft Corp Bristol-Myers Squibb Co Cisco Systems Inc Cisco Systems Inc Bristol-Myers Squibb Co Microsoft Corp Bristol-Myers Squibb Co Bristol-Myers Squibb Co Cisco Systems Inc General Electric Co Starbucks Corp Starbucks Corp Abbott Laboratories Cisco Systems Inc 1/2017 12/2016 11/2016 10/2016 Intel Corp Intel Corp Intel Corp Johnson & Johnson Accenture PLC Accenture PLC Johnson & Johnson Intel Corp Johnson & Johnson Johnson & Johnson Accenture PLC Bristol-Myers Squibb Co Adobe Inc Adobe Inc International Business Machines Corp Adobe Inc Starbucks Corp Biogen Inc Biogen Inc Starbucks Corp International Business Machines Biogen Inc International Business Machines Corp Adobe Inc Corp International Business Machines Corp Starbucks Corp Microsoft Corp Biogen Inc Bristol-Myers Squibb Co Bristol-Myers Squibb Co Starbucks Corp Microsoft Corp Microsoft Corp Microsoft Corp Bristol-Myers Squibb Co Cisco Systems Inc Cisco Systems Inc Cisco Systems Inc Cisco Systems Inc 3M Co 9/2016 8/2016 7/2016 6/2016 Intel Corp Johnson & Johnson Intel Corp Intel Corp Adobe Inc Adobe Inc Johnson & Johnson Johnson & Johnson Johnson & Johnson International Business Machines Corp Adobe Inc Adobe Inc International Business Machines International Business Machines Corp Bristol-Myers Squibb Co International Business Machines Corp Corp Bristol-Myers Squibb Co Microsoft Corp Bristol-Myers Squibb Co Merck & Co Inc Microsoft Corp Biogen Inc Microsoft Corp Microsoft Corp Starbucks Corp Starbucks Corp Biogen Inc Biogen Inc Biogen Inc 3M Co Starbucks Corp Starbucks Corp Cisco Systems Inc Oracle Corp 3M Co 3M Co Oracle Corp Accenture PLC Oracle Corp Oracle Corp 5/2016 4/2016 3/2016 2/2016 Intel Corp Intel Corp Intel Corp Intel Corp Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Adobe Inc Adobe Inc Adobe Inc Adobe Inc International Business Machines International Business Machines Corp International Business Machines Corp International Business Machines Corp Corp

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 26

Microsoft Corp Microsoft Corp Microsoft Corp Microsoft Corp Merck & Co Inc Merck & Co Inc Merck & Co Inc Merck & Co Inc Biogen Inc Starbucks Corp Starbucks Corp Starbucks Corp Starbucks Corp Biogen Inc Biogen Inc PepsiCo Inc 3M Co Bristol-Myers Squibb Co PepsiCo Inc Biogen Inc Bristol-Myers Squibb Co 3M Co 3M Co 3M Co 1/2016 12/2015 11/2015 10/2015 Intel Corp Intel Corp Intel Corp Intel Corp Adobe Inc Adobe Inc Adobe Inc Johnson & Johnson International Business Machines Johnson & Johnson Johnson & Johnson Johnson & Johnson Corp International Business Machines Corp International Business Machines Corp International Business Machines Corp Microsoft Corp Microsoft Corp Microsoft Corp Starbucks Corp Starbucks Corp Starbucks Corp Starbucks Corp Microsoft Corp Cisco Systems Inc Merck & Co Inc Merck & Co Inc Cisco Systems Inc Merck & Co Inc Cisco Systems Inc Cisco Systems Inc Merck & Co Inc PepsiCo Inc UnitedHealth Group Inc UnitedHealth Group Inc 3M Co Accenture PLC Biogen Inc Biogen Inc Biogen Inc Biogen Inc 9/2015 8/2015 7/2015 6/2015 Intel Corp Intel Corp Intel Corp Intel Corp International Business Machines Johnson & Johnson Johnson & Johnson Johnson & Johnson Corp International Business Machines Corp International Business Machines Corp International Business Machines Corp Johnson & Johnson Microsoft Corp Starbucks Corp Starbucks Corp PepsiCo Inc Starbucks Corp Merck & Co Inc Merck & Co Inc Oracle Corp Merck & Co Inc PepsiCo Inc PepsiCo Inc Starbucks Corp PepsiCo Inc Oracle Corp Oracle Corp Merck & Co Inc Cisco Systems Inc Microsoft Corp Cisco Systems Inc Cisco Systems Inc Accenture PLC Goldman Sachs Group Inc/The Goldman Sachs Group Inc/The Accenture PLC Biogen Inc Biogen Inc Accenture PLC Occidental Petroleum Corp 5/2015 4/2015 3/2015 2/2015 Intel Corp Intel Corp Intel Corp Intel Corp International Business Machines Corp Johnson & Johnson Johnson & Johnson Johnson & Johnson International Business Machines Johnson & Johnson International Business Machines Corp International Business Machines Corp Corp Cisco Systems Inc Cisco Systems Inc Merck & Co Inc Cisco Systems Inc Oracle Corp Oracle Corp Cisco Systems Inc Merck & Co Inc Starbucks Corp Starbucks Corp Starbucks Corp Starbucks Corp PepsiCo Inc Merck & Co Inc Accenture PLC Accenture PLC Merck & Co Inc PepsiCo Inc PepsiCo Inc PepsiCo Inc Accenture PLC Accenture PLC Oracle Corp Oracle Corp Occidental Petroleum Corp Occidental Petroleum Corp Occidental Petroleum Corp Occidental Petroleum Corp 1/2015 12/2014 11/2014 10/2014 PepsiCo Inc Intel Corp Intel Corp Intel Corp International Business Machines Intel Corp PepsiCo Inc International Business Machines Corp Corp International Business Machines Corp International Business Machines Corp PepsiCo Inc PepsiCo Inc Merck & Co Inc Merck & Co Inc Merck & Co Inc Merck & Co Inc

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 27

Johnson & Johnson Cisco Systems Inc Starbucks Corp Starbucks Corp Cisco Systems Inc Johnson & Johnson Cisco Systems Inc Cisco Systems Inc Starbucks Corp Starbucks Corp Johnson & Johnson Johnson & Johnson Accenture PLC Accenture PLC Accenture PLC Accenture PLC Oracle Corp Oracle Corp Occidental Petroleum Corp Oracle Corp United Parcel Service Inc United Parcel Service Inc Coca-Cola Co/The Occidental Petroleum Corp 9/2014 8/2014 7/2014 6/2014 Intel Corp Alphabet Inc Intel Corp Intel Corp International Business Machines Corp Intel Corp PepsiCo Inc Johnson & Johnson PepsiCo Inc International Business Machines Corp Merck & Co Inc Starbucks Corp International Business Machines Merck & Co Inc PepsiCo Inc Starbucks Corp Corp Starbucks Corp Merck & Co Inc International Business Machines Corp Cisco Systems Inc Cisco Systems Inc Starbucks Corp Cisco Systems Inc Accenture PLC Johnson & Johnson Cisco Systems Inc Johnson & Johnson Merck & Co Inc Accenture PLC Johnson & Johnson Accenture PLC NIKE Inc Oracle Corp Accenture PLC Goldman Sachs Group Inc/The PepsiCo Inc Coca-Cola Co/The Oracle Corp Coca-Cola Co/The Oracle Corp 5/2014 4/2014 3/2014 2/2014 Intel Corp Intel Corp Intel Corp Intel Corp Johnson & Johnson Johnson & Johnson Cisco Systems Inc Starbucks Corp Starbucks Corp Cisco Systems Inc Starbucks Corp Cisco Systems Inc International Business Machines Corp Starbucks Corp Johnson & Johnson Johnson & Johnson International Business Machines Cisco Systems Inc International Business Machines Corp International Business Machines Corp Corp Accenture PLC 3M Co PepsiCo Inc PepsiCo Inc Merck & Co Inc Medtronic PLC Medtronic PLC NIKE Inc NIKE Inc Accenture PLC Accenture PLC Medtronic PLC PepsiCo Inc Merck & Co Inc United Parcel Service Inc Accenture PLC Oracle Corp Oracle Corp NIKE Inc United Parcel Service Inc

The S&P 100 low ESG group is the following:

Figure 14:

5/2020 4/2020 3/2020 2/2020 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Boeing Co/The Boeing Co/The Boeing Co/The Boeing Co/The Costco Wholesale Corp Costco Wholesale Corp Procter & Gamble Co/The Charter Communications Inc American International Group Inc American International Group Inc Charter Communications Inc Costco Wholesale Corp Procter & Gamble Co/The Procter & Gamble Co/The Costco Wholesale Corp Procter & Gamble Co/The General Dynamics Corp Charter Communications Inc General Dynamics Corp General Dynamics Corp Dow Inc General Dynamics Corp Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc Amazon.com Inc Amazon.com Inc

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 28

Amazon.com Inc Amazon.com Inc Dow Inc American International Group Inc 1/2020 12/2019 11/2019 10/2019 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Boeing Co/The Boeing Co/The Boeing Co/The Boeing Co/The Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Charter Communications Inc Charter Communications Inc Charter Communications Inc Charter Communications Inc Procter & Gamble Co/The General Dynamics Corp Booking Holdings Inc Booking Holdings Inc Costco Wholesale Corp Booking Holdings Inc Dow Inc Dow Inc Dow Inc Dow Inc Procter & Gamble Co/The Procter & Gamble Co/The General Dynamics Corp American International Group Inc American International Group Inc American International Group Inc Booking Holdings Inc Procter & Gamble Co/The General Dynamics Corp General Dynamics Corp American International Group Inc 9/2019 8/2019 7/2019 6/2019 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Amazon.com Inc Boeing Co/The Charter Communications Inc Boeing Co/The Boeing Co/The Charter Communications Inc Boeing Co/The Amazon.com Inc Charter Communications Inc Booking Holdings Inc Southern Co/The Charter Communications Inc Procter & Gamble Co/The Procter & Gamble Co/The Booking Holdings Inc Southern Co/The Booking Holdings Inc General Dynamics Corp General Dynamics Corp Booking Holdings Inc General Dynamics Corp Costco Wholesale Corp Costco Wholesale Corp General Dynamics Corp Costco Wholesale Corp Kraft Heinz Co/The Procter & Gamble Co/The Costco Wholesale Corp Kraft Heinz Co/The Emerson Electric Co Kraft Heinz Co/The Procter & Gamble Co/The 5/2019 4/2019 3/2019 2/2019 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Amazon.com Inc Amazon.com Inc Boeing Co/The Amazon.com Inc Costco Wholesale Corp Costco Wholesale Corp Amazon.com Inc Boeing Co/The Boeing Co/The Boeing Co/The Costco Wholesale Corp Charter Communications Inc Southern Co/The Southern Co/The Booking Holdings Inc Costco Wholesale Corp Charter Communications Inc Booking Holdings Inc General Dynamics Corp Southern Co/The Booking Holdings Inc Charter Communications Inc Southern Co/The Booking Holdings Inc General Dynamics Corp Procter & Gamble Co/The Charter Communications Inc General Dynamics Corp Procter & Gamble Co/The General Dynamics Corp Kinder Morgan Inc Kraft Heinz Co/The 1/2019 12/2018 11/2018 10/2018 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Costco Wholesale Corp Costco Wholesale Corp Emerson Electric Co Charter Communications Inc Boeing Co/The Charter Communications Inc Costco Wholesale Corp Costco Wholesale Corp Southern Co/The Amazon.com Inc Charter Communications Inc Amazon.com Inc Amazon.com Inc Boeing Co/The Amazon.com Inc General Dynamics Corp Charter Communications Inc Booking Holdings Inc Boeing Co/The Berkshire Hathaway Inc Booking Holdings Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Booking Holdings Inc Berkshire Hathaway Inc Emerson Electric Co Booking Holdings Inc Emerson Electric Co

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 29

Emerson Electric Co General Dynamics Corp General Dynamics Corp Boeing Co/The General Dynamics Corp Southern Co/The Southern Co/The Southern Co/The 9/2018 8/2018 7/2018 6/2018 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Charter Communications Inc Boeing Co/The Boeing Co/The Charter Communications Inc Amazon.com Inc General Dynamics Corp General Dynamics Corp Boeing Co/The Boeing Co/The Charter Communications Inc Charter Communications Inc General Dynamics Corp Costco Wholesale Corp Amazon.com Inc Berkshire Hathaway Inc Amazon.com Inc Berkshire Hathaway Inc Costco Wholesale Corp Amazon.com Inc Berkshire Hathaway Inc General Dynamics Corp Berkshire Hathaway Inc Costco Wholesale Corp Costco Wholesale Corp Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc Emerson Electric Co Emerson Electric Co Emerson Electric Co Emerson Electric Co Booking Holdings Inc Walmart Inc Walmart Inc Southern Co/The Southern Co/The 5/2018 4/2018 3/2018 2/2018 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Boeing Co/The Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Charter Communications Inc General Dynamics Corp Charter Communications Inc Charter Communications Inc General Dynamics Corp Charter Communications Inc General Dynamics Corp General Dynamics Corp Berkshire Hathaway Inc Boeing Co/The Kraft Heinz Co/The Costco Wholesale Corp Costco Wholesale Corp Kraft Heinz Co/The Procter & Gamble Co/The Boeing Co/The Emerson Electric Co Procter & Gamble Co/The Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Booking Holdings Inc Costco Wholesale Corp Booking Holdings Inc Honeywell International Inc Southern Co/The Honeywell International Inc Boeing Co/The Emerson Electric Co Walmart Inc Booking Holdings Inc Costco Wholesale Corp Booking Holdings Inc 1/2018 12/2017 11/2017 10/2017 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Charter Communications Inc Charter Communications Inc Charter Communications Inc Charter Communications Inc Boeing Co/The Boeing Co/The Boeing Co/The Boeing Co/The General Dynamics Corp Kraft Heinz Co/The Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Costco Wholesale Corp General Dynamics Corp Kraft Heinz Co/The Kraft Heinz Co/The Procter & Gamble Co/The Costco Wholesale Corp General Dynamics Corp General Dynamics Corp Walgreens Boots Alliance Inc Procter & Gamble Co/The Costco Wholesale Corp Costco Wholesale Corp Emerson Electric Co Walgreens Boots Alliance Inc Procter & Gamble Co/The Procter & Gamble Co/The Southern Co/The Emerson Electric Co Honeywell International Inc Honeywell International Inc 9/2017 8/2017 7/2017 6/2017 Berkshire Hathaway Inc Charter Communications Inc Charter Communications Inc Kraft Heinz Co/The Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Charter Communications Inc Charter Communications Inc Netflix Inc Netflix Inc Walgreens Boots Alliance Inc Boeing Co/The General Dynamics Corp Walgreens Boots Alliance Inc Netflix Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc General Dynamics Corp Berkshire Hathaway Inc Kraft Heinz Co/The Kraft Heinz Co/The Kraft Heinz Co/The General Dynamics Corp General Dynamics Corp Boeing Co/The Boeing Co/The Costco Wholesale Corp

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 30

Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Boeing Co/The Honeywell International Inc Honeywell International Inc Booking Holdings Inc Duke Energy Corp Procter & Gamble Co/The Southern Co/The Honeywell International Inc Honeywell International Inc 5/2017 4/2017 3/2017 2/2017 Kraft Heinz Co/The Kraft Heinz Co/The Kraft Heinz Co/The Kraft Heinz Co/The Charter Communications Inc Charter Communications Inc Netflix Inc Netflix Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Charter Communications Inc Charter Communications Inc Berkshire Hathaway Inc Berkshire Hathaway Inc General Dynamics Corp Berkshire Hathaway Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Costco Wholesale Corp Costco Wholesale Corp General Dynamics Corp Costco Wholesale Corp General Dynamics Corp General Dynamics Corp Costco Wholesale Corp Boeing Co/The Walgreens Boots Alliance Inc Boeing Co/The Boeing Co/The Walgreens Boots Alliance Inc Booking Holdings Inc Booking Holdings Inc Duke Energy Corp Booking Holdings Inc Boeing Co/The Duke Energy Corp Honeywell International Inc Honeywell International Inc Honeywell International Inc 1/2017 12/2016 11/2016 10/2016 Berkshire Hathaway Inc Kraft Heinz Co/The Netflix Inc Netflix Inc Kraft Heinz Co/The Berkshire Hathaway Inc Berkshire Hathaway Inc Kraft Heinz Co/The Charter Communications Inc Netflix Inc Kraft Heinz Co/The Berkshire Hathaway Inc Netflix Inc Boeing Co/The Booking Holdings Inc Booking Holdings Inc Costco Wholesale Corp Booking Holdings Inc Boeing Co/The Walgreens Boots Alliance Inc General Dynamics Corp General Dynamics Corp General Dynamics Corp Boeing Co/The Walgreens Boots Alliance Inc Costco Wholesale Corp Costco Wholesale Corp General Dynamics Corp Booking Holdings Inc Emerson Electric Co Charter Communications Inc Costco Wholesale Corp Boeing Co/The Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Charter Communications Inc Honeywell International Inc Charter Communications Inc Duke Energy Corp Duke Energy Corp 9/2016 8/2016 7/2016 6/2016 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Kraft Heinz Co/The Berkshire Hathaway Inc Berkshire Hathaway Inc Booking Holdings Inc Berkshire Hathaway Inc Booking Holdings Inc Booking Holdings Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Berkshire Hathaway Inc Booking Holdings Inc Honeywell International Inc Costco Wholesale Corp Costco Wholesale Corp Boeing Co/The Boeing Co/The Honeywell International Inc Boeing Co/The General Dynamics Corp Costco Wholesale Corp Charter Communications Inc Honeywell International Inc Simon Property Group Inc Simon Property Group Inc Boeing Co/The Charter Communications Inc Charter Communications Inc Duke Energy Corp Duke Energy Corp Duke Energy Corp Costco Wholesale Corp General Dynamics Corp Simon Property Group Inc Simon Property Group Inc 5/2016 4/2016 3/2016 2/2016 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Berkshire Hathaway Inc Walgreens Boots Alliance Inc Costco Wholesale Corp Berkshire Hathaway Inc Walgreens Boots Alliance Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Booking Holdings Inc Honeywell International Inc Honeywell International Inc Boeing Co/The Honeywell International Inc Boeing Co/The Booking Holdings Inc Booking Holdings Inc

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 31

Boeing Co/The Booking Holdings Inc Boeing Co/The Honeywell International Inc Simon Property Group Inc Charter Communications Inc Walmart Inc Walmart Inc Walmart Inc Simon Property Group Inc Simon Property Group Inc Duke Energy Corp Charter Communications Inc Duke Energy Corp Duke Energy Corp Simon Property Group Inc 1/2016 12/2015 11/2015 10/2015 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Berkshire Hathaway Inc Berkshire Hathaway Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Chevron Corp Facebook Inc Booking Holdings Inc Chevron Corp Facebook Inc Booking Holdings Inc Boeing Co/The Booking Holdings Inc Booking Holdings Inc Chevron Corp General Dynamics Corp Boeing Co/The Boeing Co/The General Dynamics Corp Colgate-Palmolive Co General Dynamics Corp General Dynamics Corp Colgate-Palmolive Co Walmart Inc Colgate-Palmolive Co Berkshire Hathaway Inc Boeing Co/The Duke Energy Corp Walmart Inc Simon Property Group Inc Simon Property Group Inc 9/2015 8/2015 7/2015 6/2015 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Facebook Inc Facebook Inc Facebook Inc Facebook Inc Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc General Dynamics Corp General Dynamics Corp General Dynamics Corp General Dynamics Corp Chevron Corp Colgate-Palmolive Co Colgate-Palmolive Co Chevron Corp Colgate-Palmolive Co Chevron Corp Chevron Corp Simon Property Group Inc Boeing Co/The Simon Property Group Inc Simon Property Group Inc Walmart Inc Simon Property Group Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc 5/2015 4/2015 3/2015 2/2015 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Costco Wholesale Corp Facebook Inc Facebook Inc Berkshire Hathaway Inc Facebook Inc Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Facebook Inc Booking Holdings Inc Walmart Inc Walmart Inc Walgreens Boots Alliance Inc General Dynamics Corp Booking Holdings Inc Booking Holdings Inc Walmart Inc Simon Property Group Inc General Dynamics Corp General Dynamics Corp Booking Holdings Inc Chevron Corp Simon Property Group Inc Simon Property Group Inc General Dynamics Corp Walmart Inc Chevron Corp Chevron Corp Chevron Corp Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Simon Property Group Inc 1/2015 12/2014 11/2014 10/2014 Netflix Inc Netflix Inc Netflix Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Walgreens Boots Alliance Inc Facebook Inc Facebook Inc Walgreens Boots Alliance Inc Facebook Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Facebook Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 32

Walmart Inc Walmart Inc Booking Holdings Inc Walmart Inc Booking Holdings Inc Booking Holdings Inc General Dynamics Corp Booking Holdings Inc General Dynamics Corp General Dynamics Corp Walmart Inc General Dynamics Corp Simon Property Group Inc Simon Property Group Inc Honeywell International Inc Honeywell International Inc Chevron Corp Chevron Corp Simon Property Group Inc Simon Property Group Inc 9/2014 8/2014 7/2014 6/2014 Netflix Inc Netflix Inc Facebook Inc Netflix Inc Facebook Inc Facebook Inc Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Facebook Inc Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Costco Wholesale Corp Walmart Inc Walmart Inc Walmart Inc Walmart Inc Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc General Dynamics Corp General Dynamics Corp General Dynamics Corp General Dynamics Corp Honeywell International Inc Chevron Corp Honeywell International Inc Honeywell International Inc Simon Property Group Inc Honeywell International Inc NextEra Energy Inc Chevron Corp 5/2014 4/2014 3/2014 2/2014 Netflix Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Berkshire Hathaway Inc Netflix Inc Facebook Inc Facebook Inc Facebook Inc Facebook Inc Netflix Inc Netflix Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Walgreens Boots Alliance Inc Costco Wholesale Corp Costco Wholesale Corp Walmart Inc Walmart Inc Walmart Inc Walmart Inc Costco Wholesale Corp Costco Wholesale Corp Booking Holdings Inc Booking Holdings Inc Booking Holdings Inc General Dynamics Corp General Dynamics Corp General Dynamics Corp General Dynamics Corp Booking Holdings Inc Chevron Corp Chevron Corp Honeywell International Inc Honeywell International Inc NextEra Energy Inc Honeywell International Inc Chevron Corp Chevron Corp

Then, for the DAX 30, we have the following high ESG group:

Figure 15:

5/2020 4/2020 3/2020 2/2020 Deutsche Post AG Deutsche Post AG SAP SE SAP SE SAP SE SAP SE Deutsche Post AG Deutsche Post AG Siemens AG Siemens AG Siemens AG Siemens AG 1/2020 12/2019 11/2019 10/2019 SAP SE SAP SE SAP SE MTU Aero Engines AG Deutsche Post AG Deutsche Post AG Deutsche Post AG SAP SE Siemens AG Siemens AG Siemens AG Deutsche Post AG 9/2019 8/2019 7/2019 6/2019

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 33

MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA SAP SE SAP SE SAP SE SAP SE 5/2019 4/2019 3/2019 2/2019 MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA SAP SE SAP SE SAP SE SAP SE 1/2019 12/2018 11/2018 10/2018 MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG 9/2018 8/2018 7/2018 6/2018 MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG 5/2018 4/2018 3/2018 2/2018 MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG MTU Aero Engines AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG 1/2018 12/2017 11/2017 10/2017 MTU Aero Engines AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Post AG Deutsche Post AG Deutsche Post AG 9/2017 8/2017 7/2017 6/2017 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Post AG Deutsche Post AG Deutsche Post AG Deutsche Post AG 5/2017 4/2017 3/2017 2/2017 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Telekom AG Deutsche Post AG Deutsche Post AG Deutsche Post AG Deutsche Post AG 1/2017 12/2016 11/2016 10/2016 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Deutsche Telekom AG Deutsche Telekom AG Deutsche Post AG Deutsche Post AG Deutsche Post AG Deutsche Post AG SAP SE adidas AG 9/2016 8/2016 7/2016 6/2016 Deutsche Post AG Deutsche Post AG Deutsche Post AG Deutsche Post AG adidas AG adidas AG adidas AG Henkel AG & Co KGaA Merck KGaA Merck KGaA Merck KGaA Merck KGaA 5/2016 4/2016 3/2016 2/2016 Deutsche Post AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA SAP SE SAP SE SAP SE SAP SE Bayerische Motoren Werke AG Bayerische Motoren Werke AG Bayerische Motoren Werke AG

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 34

1/2016 12/2015 11/2015 10/2015 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Merck KGaA Merck KGaA Merck KGaA Merck KGaA Deutsche Post AG Deutsche Post AG SAP SE SAP SE 9/2015 8/2015 7/2015 6/2015 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Merck KGaA Merck KGaA Merck KGaA Merck KGaA SAP SE SAP SE SAP SE SAP SE 5/2015 4/2015 3/2015 2/2015 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Merck KGaA Merck KGaA Merck KGaA Merck KGaA SAP SE SAP SE SAP SE SAP SE 1/2015 12/2014 11/2014 10/2014 Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Merck KGaA Merck KGaA Merck KGaA Merck KGaA SAP SE SAP SE SAP SE SAP SE Deutsche Post AG 9/2014 8/2014 7/2014 6/2014 Merck KGaA Merck KGaA Merck KGaA adidas AG SAP SE SAP SE SAP SE Henkel AG & Co KGaA Deutsche Post AG Allianz SE Bayerische Motoren Werke AG Volkswagen AG 5/2014 4/2014 3/2014 2/2014 adidas AG adidas AG adidas AG adidas AG Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Henkel AG & Co KGaA Muenchener Muenchener Rueckversicherungs-Gesellschaft Rueckversicherungs-Gesellschaft Muenchener Rueckversicherungs-Gesellschaft Volkswagen AG AG in Muenchen AG in Muenchen AG in Muenchen

Next is the DAX 30 low ESG group:

Figure 16:

5/2020 4/2020 3/2020 2/2020 Volkswagen AG Volkswagen AG Volkswagen AG Volkswagen AG Wirecard AG Wirecard AG Wirecard AG Wirecard AG Fresenius Medical Care AG & Co Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA KGaA 1/2020 12/2019 11/2019 10/2019 Volkswagen AG Volkswagen AG Volkswagen AG Volkswagen AG Wirecard AG Wirecard AG Wirecard AG Wirecard AG Fresenius Medical Care AG & Co Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA KGaA 9/2019 8/2019 7/2019 6/2019 Volkswagen AG Volkswagen AG Volkswagen AG Wirecard AG Wirecard AG Wirecard AG Wirecard AG Volkswagen AG Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Vonovia SE 5/2019 4/2019 3/2019 2/2019 Wirecard AG Wirecard AG Wirecard AG Wirecard AG

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 35

Volkswagen AG Volkswagen AG Volkswagen AG Volkswagen AG Vonovia SE Vonovia SE Vonovia SE Vonovia SE 1/2019 12/2018 11/2018 10/2018 Wirecard AG Wirecard AG Wirecard AG Wirecard AG Volkswagen AG Volkswagen AG Volkswagen AG Volkswagen AG Vonovia SE Vonovia SE Vonovia SE Vonovia SE 9/2018 8/2018 7/2018 6/2018 Wirecard AG Wirecard AG Wirecard AG Wirecard AG Volkswagen AG Vonovia SE Vonovia SE Vonovia SE Vonovia SE Volkswagen AG Volkswagen AG Volkswagen AG 5/2018 4/2018 3/2018 2/2018 Fresenius Medical Care AG & Co Wirecard AG Wirecard AG Fresenius Medical Care AG & Co KGaA KGaA Vonovia SE Vonovia SE Wirecard AG Wirecard AG Volkswagen AG Volkswagen AG Fresenius SE & Co KGaA Fresenius SE & Co KGaA 1/2018 12/2017 11/2017 10/2017 Fresenius Medical Care AG & Co Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA KGaA Wirecard AG Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Vonovia SE Vonovia SE Vonovia SE 9/2017 8/2017 7/2017 6/2017 Fresenius Medical Care AG & Co Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Vonovia SE Vonovia SE Vonovia SE Vonovia SE Fresenius SE & Co KGaA 5/2017 4/2017 3/2017 2/2017 Fresenius Medical Care AG & Co Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Vonovia SE Vonovia SE Vonovia SE Beiersdorf AG 1/2017 12/2016 11/2016 10/2016 Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Vonovia SE Vonovia SE Beiersdorf AG Beiersdorf AG Beiersdorf AG Fresenius Medical Care AG & Co KGaA Vonovia SE 9/2016 8/2016 7/2016 6/2016 Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Beiersdorf AG Beiersdorf AG Beiersdorf AG Beiersdorf AG Fresenius Medical Care AG & Co Vonovia SE Vonovia SE Fresenius Medical Care AG & Co KGaA KGaA 5/2016 4/2016 3/2016 2/2016 Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Beiersdorf AG Beiersdorf AG Beiersdorf AG Beiersdorf AG Fresenius Medical Care AG & Co Vonovia SE Vonovia SE Fresenius Medical Care AG & Co KGaA KGaA 1/2016 12/2015 11/2015 10/2015 Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius Medical Care AG & Co Fresenius Medical Care AG & Co KGaA Vonovia SE Fresenius Medical Care AG & Co KGaA KGaA Beiersdorf AG Fresenius Medical Care AG & Co KGaA Beiersdorf AG Vonovia SE 9/2015 8/2015 7/2015 6/2015 Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Beiersdorf AG Vonovia SE Vonovia SE Vonovia SE Fresenius SE & Co KGaA Fresenius Medical Care AG & Co KGaA Fresenius Medical Care AG & Co KGaA Beiersdorf AG Vonovia SE 5/2015 4/2015 3/2015 2/2015 Beiersdorf AG Beiersdorf AG Beiersdorf AG Beiersdorf AG Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Vonovia SE Vonovia SE Vonovia SE Vonovia SE 1/2015 12/2014 11/2014 10/2014 Beiersdorf AG Beiersdorf AG Beiersdorf AG Beiersdorf AG

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 36

Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Vonovia SE Vonovia SE Deutsche Wohnen SE Deutsche Wohnen SE 9/2014 8/2014 7/2014 6/2014 Beiersdorf AG Beiersdorf AG Beiersdorf AG Beiersdorf AG Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Deutsche Wohnen SE Deutsche Wohnen SE Deutsche Wohnen SE Deutsche Wohnen SE 5/2014 4/2014 3/2014 2/2014 Beiersdorf AG Beiersdorf AG Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Fresenius SE & Co KGaA Beiersdorf AG Beiersdorf AG Deutsche Wohnen SE Deutsche Wohnen SE Deutsche Wohnen SE Deutsche Wohnen SE

As one can see, the list of companies is diverse and close to industry agnostic. For example, we can spot Facebook, Amazon or Fresenius in the low ESG groups. Ex-ante, one would think that technology and healthcare companies would not be low ESG as they are not, for instance, fossil fuel companies. In fact, Occidental, an oil exploration company, makes an appearance in the high ESG group! This makes me confident of the fact that the ESG index does indeed control for industry by focusing “primarily on capturing the level of management in key ESG areas through the lens of indicators determined according to their relevancy within that particular industry.”

However, appearing in the low ESG group may simply be informative of risk ex-post, companies are only punished by an appearance in the low portfolio after they do something reprimandable. In fact, Volkswagen actually went from the high to the low ESG group only after its emissions scandals, diesel gate. However, Wirecard, a consistent member of the low ESG club and on my list, has appeared in the low ESG portfolio since 2018. There had already been rumblings back then about something not being quite right, they were correct. If you had avoided this company, you would have not been affected by their accounting scandal (only very recently discovered) where they inflated profits by switching around their origination location and faked 2/3 of their sales. Indeed, appearing in the low ESG group might give you negative indications ex-ante as well as ex-post.

The next step according to my methodology is to obtain the monthly return of each group. This is just the simple average of the individual returns of each company in the portfolio in a given month. For this, I obtained stock market price data from Bloomberg. Note that if a month began on a closed market, the first trading day was used as reference instead. Similarly, the last trading day of the month was used as the last day of the month. Therefore, the cumulative return for each of the 4 groups over the 76 period time frame can be calculated very easily. For simplicity, I normalise the portfolios to start at 100 on January 31st 2014. I obtain the following results:

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 37

Figure 17:

S&P 100 High vs Low ESG 220 200 180 160 140 120 100 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 May-14 May-15 May-16 May-17 May-18 May-19 May-20

High ESG Low ESG

Cumulative High ESG end of period 189.18 Cumulative Low ESG end of period 189.96

Figure 18:

DAX 30 High vs Low ESG 240 220 200 180 160 140 120 100 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 May-14 May-15 May-16 May-17 May-18 May-19 May-20

High ESG Low ESG

Cumulative High ESG end of period 205.54 Cumulative Low ESG end of period 170.62

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As can be appreciated in Figure 17, results are very similar for both S&P groups. However, this is not the case for the DAX portfolios, returns for the high ESG are 50% higher than the low. This can be for a multitude of reasons, including the cultural norms that we previously discussed (differences in the importance given to ESG by investors) or simply certain scandals that may have occurred involving portfolio companies. I believe that the latter may have had a large impact on the DAX as both the Wirecard and Volkswagen scandals were both mediatic and punishing for their respective stocks. Nonetheless, the brunt of the Wirecard scandal was after the portfolio end date.

I therefore carry out the same exercise for the DAX as before but without including either Volkswagen or Wirecard in the low ESG group:

Figure 19:

Modified DAX 30 High vs Low ESG 240 220 200 180 160 140 120 100 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 May-14 May-15 May-16 May-17 May-18 May-19 May-20

High ESG Low ESG

Cumulative High ESG end of period 205.54 Cumulative Low ESG end of period 189.59

The differences are tighter as expected, especially so due to performance in the recovery post the Covid-19 market lows of March. In my opinion, these results can support the claim that an ESG screen protects you from companies that are outliers in how badly they do in ESG terms.

ESG screens protect the investor from a Volkswagen, British Petroleum or Wirecard-type event.

Nonetheless, there are many issues with concluding this line of reasoning like this. Most obviously, by omitting both Volkswagen and Wirecard, you end up with a low ESG group that

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 39

is composed of just one single company for many months at a time. This leads to huge idiosyncratic risk affecting our group and portfolio. Further, econometrically, differences between the high and low groups in either portfolio could be down to omitted variable bias. This is where we return to the Carhart extension of the Fama & French model:

� = �� + �� − � + �(���) + �(���) + �(���) + �

As outlined in Section 2, we have to account/control for market risk, stock market capitalisation, valuation and momentum. If we don’t do this, we may falsely be attributing superior returns to ESG.

Consequently, we use the Carhart equation above and make the following modification to the dependant variable and constant to fit our methodology:

� − � = ∝ + �� − � + �(���) + �(���) + �(���) + �

Above, we subtract the monthly returns of the high group vs the low group ie. � & − � &. We then regress this term against the values (independent variables) given by French on his website23, a common procedure in the literature. The same is done for both indexes/portfolios. Further, rf is no longer needed due to the fact that we are studying the difference in returns for two separate groups and is hence replaced by a constant, alpha (∝).

It is important to note that the independent variable values, ie. those for SMB or HML, are different for the DAX portfolio than for the S&P portfolio (French calculates regional values on his website). In the case of the S&P 100, US data is used but for the DAX 30, French does not solely have German data available so I use his European factor data instead. This includes data from the following countries:

Figure 20:

Austria Great Britain Belgium Greece Switzerland Ireland Germany Italy Denmark Netherlands Spain Norway Finland Portugal France Sweden

Source: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html23

There are obvious concerns about taking European factor data and applying it to the solely German DAX portfolio. However, correlation between markets in Europe is high and hence I expect that so is the correlation for our regressors.

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 40

I use the following factor data (French website)23 and stock market returns previously used for the portfolio formation (Bloomberg Terminal):

Figure 21:

S&P 100 (US Factors):

Rm-Rf SMB HML MOM Rh-Rl Feb-14 4.65 0.34 -0.4 2.07 -5.103219016 Mar-14 0.43 -1.89 5.09 -3.34 6.433602006 Apr-14 -0.19 -4.24 1.14 -3.86 0.846609339 May-14 2.06 -1.86 -0.27 1.15 -1.921473456 Jun-14 2.61 3.08 -0.74 0.67 0.760248064 Jul-14 -2.04 -4.25 0.01 -0.25 1.980606482 Aug-14 4.24 0.36 -0.59 0.8 0.416583071 Sep-14 -1.97 -3.83 -1.23 0.52 0.511525971 Oct-14 2.52 4.21 -1.7 0 -4.659889311 Nov-14 2.55 -2.09 -3 1.06 0.977892323 Dec-14 -0.06 2.55 2.06 1.09 -1.604149266 Jan-15 -3.11 -0.56 -3.48 3.84 -3.207670093 Feb-15 6.13 0.49 -1.81 -2.83 -1.699408516 Mar-15 -1.12 3.03 -0.46 3.02 -1.163252935 Apr-15 0.59 -2.98 1.85 -7.39 1.123263973 May-15 1.36 0.87 -1.37 6.01 1.198492986 Jun-15 -1.53 2.83 -0.79 3.03 -2.156779693 Jul-15 1.54 -4.15 -4.12 10.33 -5.347225116 Aug-15 -6.04 0.49 2.66 -2.12 -1.939725795 Sep-15 -3.08 -2.64 0.53 5.33 1.632984176 Oct-15 7.75 -1.97 -0.07 -4.04 -0.237335215 Nov-15 0.56 3.64 -0.51 2.32 0.709329073 Dec-15 -2.17 -2.83 -2.59 3.45 1.555859884 Jan-16 -5.77 -3.35 2.08 1.33 0.602610371 Feb-16 -0.07 0.79 -0.5 -4.11 -2.674034555 Mar-16 6.96 0.87 1.16 -5.13 -1.112061428 Apr-16 0.92 0.69 3.26 -6.27 1.183577861 May-16 1.78 -0.27 -1.81 1.92 4.157433728 Jun-16 -0.05 0.65 -1.47 4.22 -2.31511086 Jul-16 3.95 2.64 -1.11 -2.99 3.992626095 Aug-16 0.5 1.16 3.34 -3.12 -2.1952446 Sep-16 0.25 2.02 -1.49 -0.58 0.162912788 Oct-16 -2.02 -4.39 4.16 0.64 -5.66133657

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Nov-16 4.86 5.47 8.29 -4.15 -0.492650278 Dec-16 1.81 0.1 3.58 -0.42 -0.181192956 Jan-17 1.94 -1.04 -2.78 -0.94 -5.161891513 Feb-17 3.57 -2.02 -1.79 -1.65 0.835214533 Mar-17 0.17 1.2 -3.17 -0.92 0.480744363 Apr-17 1.09 0.71 -1.87 0.55 -2.277516559 May-17 1.06 -2.54 -3.78 1.45 -2.283578071 Jun-17 0.78 2.17 1.35 -0.26 3.623871171 Jul-17 1.87 -1.41 -0.29 1.63 -7.320363249 Aug-17 0.16 -1.67 -2.24 3.52 1.860861369 Sep-17 2.51 4.55 3.03 -1.17 0.164294257 Oct-17 2.25 -1.94 -0.05 4.3 7.171546701 Nov-17 3.12 -0.65 -0.04 -0.73 -2.442051087 Dec-17 1.06 -1.28 0.14 -1.65 -1.291598258 Jan-18 5.58 -3.03 -1.37 3.93 -3.323801168 Feb-18 -3.65 0.26 -1.19 3.96 -1.211394106 Mar-18 -2.35 3.95 -0.12 -1.24 2.472870808 Apr-18 0.29 1.12 0.54 0.2 2.393801729 May-18 2.65 5.23 -3.16 3.81 0.949916463 Jun-18 0.48 1.18 -2.38 -2.39 -4.390208829 Jul-18 3.19 -2.17 0.43 -1.6 0.750026853 Aug-18 3.44 1.15 -4.08 5.31 0.197946379 Sep-18 0.06 -2.37 -1.3 -0.07 0.059313442 Oct-18 -7.68 -4.76 3.44 -1.82 -0.964268297 Nov-18 1.69 -0.79 0.25 -1.42 3.663333353 Dec-18 -9.55 -2.63 -1.47 1.83 2.264078555 Jan-19 8.41 3.01 -0.62 -8.68 -3.564541119 Feb-19 3.4 2.06 -2.84 0.79 6.481123803 Mar-19 1.1 -3.13 -4.07 2.18 1.807563628 Apr-19 3.96 -1.68 1.93 -2.61 -1.328068373 May-19 -6.94 -1.2 -2.39 7.61 -2.751283204 Jun-19 6.93 0.34 -1.08 -2.23 0.184239783 Jul-19 1.19 -2.07 0.14 2.68 3.583691513 Aug-19 -2.58 -2.41 -4.99 7.6 -1.98035342 Sep-19 1.43 -0.9 6.71 -6.85 0.529994959 Oct-19 2.06 0.25 -2.07 0.24 -0.279015981 Nov-19 3.87 0.87 -1.86 -2.62 0.957729677 Dec-19 2.77 0.68 1.83 -2.13 2.348172283 Jan-20 -0.11 -3.11 -6.27 5.56 4.713170408 Feb-20 -8.13 0.96 -4.01 -0.25 -2.670382964

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 42

Mar-20 -13.39 -5.16 -14.12 8.47 3.324976908 Apr-20 13.65 2.78 -1.27 -5.29 6.160275225 May-20 5.58 2.47 -4.95 0.85 1.023128557

Figure 22:

DAX 30 (European Factors):

Rm-Rf SMB HML MOM Rh-Rl Feb-14 7.42 0.42 0.64 2.17 1.17702954 Mar-14 -0.55 0.3 1.78 -0.99 2.46125752 Apr-14 1.77 -2.21 0.46 -3.53 5.89205381 May-14 0.77 -0.7 -0.42 -0.24 -1.4881817 Jun-14 -0.12 0.07 -1.62 0.31 0.49558765 Jul-14 -4.1 -0.4 0.26 -0.58 -4.8635602 Aug-14 -0.02 -0.98 -0.99 0.33 3.79095511 Sep-14 -3.79 -2.29 -0.35 2.48 1.42333528 Oct-14 -2.7 -1.26 -3.19 1.08 -2.722792 Nov-14 2.12 -1.38 -1.93 -0.62 -3.3779803 Dec-14 -3.7 2.2 -2.4 1.99 2.44116164 Jan-15 -0.3 -1.6 -3.48 3.49 -15.163046 Feb-15 6.21 1.02 1.91 -3.96 3.21295372 Mar-15 -2.28 -0.5 -0.42 1.57 5.71977209 Apr-15 4.79 2.18 0.39 -2.14 4.63004512 May-15 -0.15 1.65 -2.59 3.56 -3.9734759 Jun-15 -2.84 2.02 0.13 0.92 0.93531225 Jul-15 2.39 -0.81 -2.66 3.54 -3.3288915 Aug-15 -6.02 3.71 -0.99 2.11 -4.4215993 Sep-15 -4.27 1.11 -3.63 4.28 -1.2239938 Oct-15 6.19 -2.97 -0.77 -1.56 12.2572444 Nov-15 -1.49 0.33 -2.8 2.6 3.71452228 Dec-15 -1.86 3.77 -1.25 4.01 -1.8779914 Jan-16 -6.43 -0.76 -1.49 1.15 -14.515652 Feb-16 -1.71 1.46 0.38 -0.71 2.7917213 Mar-16 6.7 1.71 1.18 -1.48 3.5690394 Apr-16 2.38 -0.64 3.35 -3.91 4.67106428 May-16 -0.38 1.53 -2.87 3.81 1.61918183 Jun-16 -5.01 -2.39 -1.64 7.1 -0.4545731 Jul-16 4.44 1.54 0.21 -0.09 6.61985106 Aug-16 0.77 1.61 1.92 -1.76 -3.1086208

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 43

Sep-16 0.95 0.92 -0.14 3.14 -0.4350446 Oct-16 -3.08 -0.78 6.36 -0.83 2.2275782 Nov-16 -2.5 0.89 1.92 -2.04 0.50790531 Dec-16 4.72 -0.83 1.99 -1.97 0.59457949 Jan-17 2.84 2.03 0.47 2.83 1.85358978 Feb-17 0.68 -0.04 -2.6 -1.6 -0.1031707 Mar-17 4.27 -1.3 0.5 0.02 -1.3602655 Apr-17 4.63 1.91 -1.3 0.23 2.61830785 May-17 5.03 0.02 -0.79 -0.42 -1.548994 Jun-17 -0.67 1.55 2.04 1.59 3.36886292 Jul-17 3.49 0.79 2.6 1.96 1.71876471 Aug-17 0.11 -0.06 -0.7 1.33 5.04175384 Sep-17 2.72 -0.11 0.47 0.62 6.87229701 Oct-17 0.59 -0.96 -0.12 1.23 1.52712559 Nov-17 -0.01 -0.37 1.28 0.29 3.69801567 Dec-17 1.47 1.55 0.5 -1.4 -4.5191929 Jan-18 5.52 0.8 1.1 2.95 -12.462365 Feb-18 -5.35 1.22 -0.75 0.61 -3.6842234 Mar-18 -0.71 -0.56 -0.94 -0.43 2.27769367 Apr-18 2.2 -0.75 1.5 0.69 0.50449902 May-18 -2.73 1.23 -4.98 2 -8.282791 Jun-18 -0.92 -0.84 -1.56 -0.65 2.60844543 Jul-18 2.69 -1.92 0.41 -0.55 -2.1763431 Aug-18 -2.65 0.87 -2.64 2.4 -9.5727288 Sep-18 0.12 -1.45 2.33 1.59 -0.7159763 Oct-18 -8.54 -1.7 1.48 -1.46 10.8869991 Nov-18 -1.31 -1.18 -0.57 -2.08 11.1090578 Dec-18 -4.59 -0.67 0.95 3.28 2.6562622 Jan-19 6.19 0.6 -0.96 -2.21 -13.257141 Feb-19 2.93 -1.47 -1.22 -1.13 3.48050169 Mar-19 0.58 -1.76 -2.32 4.51 10.6769102 Apr-19 3.7 0.11 -1.05 -4.4 3.04728194 May-19 -5.34 1.32 -1.54 8.49 -1.4454298 Jun-19 5.87 -2.64 -1.32 -0.45 11.2878105 Jul-19 -2.56 -1.28 0.04 1.39 -5.0771117 Aug-19 -2.39 -0.61 -1.91 3.29 -0.5083711 Sep-19 2.15 -0.86 3.08 -2.27 -3.4765573 Oct-19 3.26 0.96 -0.51 -1.08 8.17512852 Nov-19 1.78 2.05 -2.29 0.67 9.45882677 Dec-19 4.07 2.79 0.4 1.65 2.44308813

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 44

Jan-20 -2.55 0.36 -2.95 3.59 -8.7014575 Feb-20 -8.94 0.24 -0.69 0.71 -8.6572136 Mar-20 -15.44 -4.32 -10.96 7.62 2.67436582 Apr-20 6.7 5.03 -3.87 1.07 2.54472362 May-20 5.42 1.21 -4.12 2.91 14.0104475

4. Results

I now display my regression results for both the DAX and S&P portfolios (2014-2020). If ESG causes unexplained positive returns, we would have statistically significant ∝.

Figure 23:

S&P 100 Portfolio:

Coefficients Standard Error t Stat P-value ⍺ -0.07130412 0.369820505 -0.192807373 0.847660289 Rm-Rf 0.02584608 0.097714584 0.26450586 0.792156477 SMB -0.029958779 0.149283637 -0.200683607 0.841519745 HML -0.077302269 0.139733926 -0.553210459 0.581857133 MOM -0.06835234 0.125358892 -0.545253222 0.58728822

Figure 24:

DAX 30 Portfolio:

Coefficients Standard Error t Stat P-value ⍺ 0.836756938 0.725747239 1.152959175 0.252794048 Rm-Rf 0.293758779 0.186040107 1.57900779 0.118779515 SMB -0.511020037 0.423795654 -1.205817079 0.231891111 HML -0.040051696 0.349013368 -0.114756911 0.908961723 MOM -0.245865404 0.339362888 -0.724491135 0.471145025

As can be appreciated above, alpha is not statistically significant in either regression, meaning that ESG does not cause unexplained returns, either positive or negative in our back tested portfolio. We achieve very large positive alpha in the DAX portfolio and negative alpha in the S&P portfolio but both are statistically insignificant. Further, for the individual factors, nothing is statistically significant at the 95% level. The reasons for these results may be the relatively

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 45

small sample size, both through having very concentrated portfolios and due to only having 76 periods that just encompass a little over 6 years. In other words, it is possible that in small periods of time, factors don’t appear significant and that the ESG phenomenon can’t be observed. However, it is noteworthy that alpha is large and positive in the DAX portfolio- this may allude to what was previously mentioned in the introduction, European investors are more concerned about ESG than their American counterparts.

Furthermore, the ESG focus may be very recent and that positive alpha can only be achieved since 2019 (Figure 3, 4 and 5). This is the reason why I now focus on just the 17 monthly periods between January 2019 and May 2020 to see if we can extract positive alpha in more recent times.

Figure 25:

S&P 100 Portfolio:

(Recent) S&P 100 High vs Low ESG 140

130

120

110

100

90

Jul-19 Dec-18 Jan-19Feb-19Mar-19 Apr-19May-19 Jun-19 Aug-19Sep-19 Oct-19Nov-19Dec-19 Jan-20Feb-20Mar-20 Apr-20May-20

High ESG Low ESG

Cumulative High ESG end of period 136.35 Cumulative Low ESG end of period 114.15

Coefficients Standard Error t Stat P-value Intercept -0.0703049 1.030940367 -0.068194924 0.946753607 Rm-Rf 0.347230322 0.185389166 1.872980655 0.08562756 SMB -0.347640004 0.487211412 -0.713530093 0.489163158 HML -0.220598527 0.253784166 -0.869236762 0.401769447 MOM 0.131971563 0.290453838 0.454363296 0.657676573

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 46

Figure 26:

DAX 30 Portfolio:

(Recent) DAX 30 High vs Low ESG 140 130 120 110 100 90 80

Jul-19 Dec-18 Jan-19Feb-19Mar-19 Apr-19May-19 Jun-19 Aug-19Sep-19 Oct-19Nov-19Dec-19 Jan-20Feb-20Mar-20 Apr-20May-20

High ESG Low ESG

Cumulative High ESG end of period 122.04 Cumulative Low ESG end of period 98.78

Coefficients Standard Error t Stat P-value ⍺ -1.764284128 2.259061343 -0.780981063 0.449946591 Rm-Rf 1.133011396 0.44892785 2.523816232 0.02672125 SMB -1.093806507 0.96079085 -1.138443926 0.277153591 HML -0.993950194 0.779651068 -1.27486543 0.226488505 MOM 0.837988888 0.761150003 1.100951041 0.292511917

The results for these 2019-2020 portfolios are also inconclusive, we don’t obtain positive statistically significant alpha. However, we see very large market parameters. First, in both portfolios, the � − � coefficient is large. Considering that the portfolios are long some stocks and short some others, this coefficient should be closer to zero (being market neutral). Thus, the portfolio does very well when the market goes up. Similarly, momentum is also large in both cases, if stocks that have done well in the past continue to go up, the portfolio will perform well. Both these sets of results considered, it makes me think that ESG benefits greatly from momentum and has a large cyclical component, ie. it does well in a bullish market and shows bubble like qualities. In a market propped up by the FED (the current market climate), ESG should hence do very well.

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 47

We have seen that ESG screening is worthwhile in terms of cumulative returns but does not achieve alpha. Considering that these are long-short portfolios, the difference between high ESG and low ESG is remarkably large in all but the 2014-2020 S&P 100 portfolio. However, statistically we can’t conclude that it is ESG causing these positive returns, other Fama & French factors are at play here. The ESG component is most likely hidden in momentum and/or market ß, ESG not being identifiable directly with the Carhart extension of the Fama & French model.

Nonetheless, what is evident through the graphs and the momentum and ß coefficients for both 2019-2020 portfolios is that there is a large recent positive trend in ESG returns. Is this just because ESG stocks show higher momentum than the average (are they cyclical in nature)? Are ESG stocks going up because they simply went up in recent months or are their fundamentals changing?

5. Discussion

High ESG stocks may go up due to what we could call stock price inflation (financial returns independent of actual fundamental change) or, alternatively, due to pure fundamentals. Understanding if the fundamentals of high ESG companies, relative to low ESG companies, are recently now that much better to warrant such high returns is not an easy task. It requires a very thorough understanding of many different industries. Still, I believe, we can almost assume ceteris paribus and instead study if there has been an exaggerated multiple rerating. If the multiple rerating is very large in relative terms, one can reach the conclusion that there is an ESG bubble.

Wanting to compare industry multiples, I have chosen to compare the utilities sector (independent power producers) against utilities (regulated industry) and coal & uranium. Independent power producers are mainly solar and wind based, whilst the regulated industry obtains its raw power from traditional sources, inherently less ESG alongside the coal and uranium producers. As the Price/Earnings (P/E) ratio requires positive net income to have some interpretive value, I have chosen to compare these industries using another valuation multiple, Price/Sales (P/S).

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 48

Figure 27:

P/S Across Key Industries 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 03/31/2014 06/30/2014 09/30/2014 12/31/2014 03/31/2015 06/30/2015 09/30/2015 12/31/2015 03/31/2016 06/30/2016 09/30/2016 12/31/2016 03/31/2017 06/30/2017 09/30/2017 12/31/2017 03/31/2018 06/30/2018 09/30/2018 12/31/2018 03/31/2019 06/30/2019 09/30/2019 12/31/2019 03/31/2020 06/30/2020 08/29/2020

P/S Utilities (Independent Power Producers) P/S Utilities (Regulated Industry) P/S Coal and Uranium Producers

Source: GuruFocus.com26

As can be appreciated in the figure above, the multiple rerating of the independent power producers relative to the regulated industry is stark. This phenomenon is especially true since 2019. What can also be discerned is that the P/S ratio of the independent power producers is much more volatile compared to that of the regulated industry. This may sustain the point that very ESG industries or sectors can show bubble-like qualities in cyclical waves. I posit that a big contributor to this are the huge inflows into ESG funds and companies as outlined in the introduction.

Similarly, since the start of 2019, coal has seen a sizeable relative P/E derating when compared to metals and mining, a comparison industry that has not particularly benefited from ESG interest:

26 GuruFocus.com

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 49

Figure 28:

Industry P/E:

Source: Citi Research5

Other sectors have also been highlighted as particularly ESG, the “big tech” software sector in particular. This can be seen in the composition of ESG funds that hold the following average positions (out of total AUM) in FAANG + Microsoft:

Figure 29:

Source: Refinitiv27

One can argue that as they capitalise such a high percentage of the S&P 500, it is to be expected that they are bought in such large quantities by ESG funds. However, these

27 Refinitiv.com

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 50

companies still have ESG concerns, recently Facebook vis-à-vis data privacy issues. No matter the validity of the investment on ESG terms, such large interest for these companies causes multiple appreciation and further raises the concern that ESG, alongside the tech-dominated US stock market, is undergoing unsustainable appreciation. In Figure 30 we also see a decade- long multiple appreciation with respect to its closest cousin, technology hardware:

Figure 30:

P/S Software vs Hardware 7

6

5

4

3

2

1

0 06/30/2000 03/31/2001 12/31/2001 09/30/2002 06/30/2003 03/31/2004 12/31/2004 09/30/2005 06/30/2006 03/31/2007 12/31/2007 09/30/2008 06/30/2009 03/31/2010 12/31/2010 09/30/2011 06/30/2012 03/31/2013 12/31/2013 09/30/2014 06/30/2015 03/31/2016 12/31/2016 09/30/2017 06/30/2018 03/31/2019 12/31/2019 08/30/2020

P/S Software P/S Hardware

Source: GuruFocus.com26

FAANG + Microsoft have also experienced significant share price increases YTD in absolute terms and relative to the S&P 500 (an index that they themselves help to prop up). Having ESG funds hold a huge 19% of their AUM in FAANG + Microsoft compared to the 20% that other (non-ESG) funds hold28 is very revealing, boosting these companies even further in the stock market due to their ESG claim.

28 Expansion.com

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 51

Figure 31:

FAANG + MSFT Take Off

180

160

140

120

100

80

60

02/01/2020 02/02/2020 02/03/2020 02/04/2020 02/05/2020 02/06/2020 02/07/2020 02/08/2020 02/09/2020

Facebook Amazon Apple Netlfix Alphabet Microsoft S&P 500

Source: Yahoo Finance29

I believe that the market is showing signs of willingness to overlook ESG lapses in growth companies, perhaps due to investors believing that an ESG squeeze is unlikely. In addition, it may be because the ESG issues involved with FAANG and others are, in fact, not that important to the business, they are mainly issues of behaviour and not product, making them very correctable.

Furthermore, even when FAANG + Microsoft are part of the S&P 500, the difference between them and the index is noteworthy as can be seen in the figure above that rebases prices to 100 at the start of the year. Without their inclusion, the S&P 500 index would be well into negative territory YTD. Stocks like Tesla, with somewhat of a more obvious ESG leaning, have also done fabulously well, Tesla multiplying by 5 since March (before the stock split).

The above is not just the case for big tech or American companies for that matter, we can also appreciate this phenomenon in small caps in Spain, the Spanish market having not done well YTD at -28% (IBEX 35) whilst the renewables shoot off. These are, for American standards, microcaps, but have done very well albeit their very little fame.

29 finance.yahoo.com

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 52

Figure 32:

Spanish Renewables vs IBEX 35 250 230 210 190 170 150 130 110 90 70 50

02/01/2020 02/02/2020 02/03/2020 02/04/2020 02/05/2020 02/06/2020 02/07/2020 02/08/2020 02/09/2020

Audax Grenergy Solaria Solarpack IBEX 35

Source: Yahoo Finance29

Furthermore, big Spanish giants like Iberdrola also showed tremendous resilience during the worst of the Covid-19 crisis, in no small part due to their ESG angle.

5.1. Evaluation

It has been shown that ESG does not generate alpha. However, ESG companies show very high momentum and market ß in the past couple of years. Regardless, ESG is a multifaceted label and should be further discussed in its entirety, as will be done so below in an evaluative manner.

ESG is a three-pronged fork; environmental, social and governance concerns being heterogenous whilst also being built up of a multitude of different components themselves. For further research I would subsequently investigate all three elements separately, could one of them create alpha if isolated? Could a combination of two create alpha? Indeed, investors may care more about the “E” than the “S”, bidding up environmentally friendly companies in the process.

Furthermore, headline ESG scores available through the major providers may not capture the true ESG interest that a company creates, investors may carry out their due diligence using other metrics or no hard metrics at all, through which other companies may shine. Therefore,

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 53

using ESG scores may just be a first order screen, investors combining it with other research or not using it at all in their investment processes.

Interestingly, ESG scores also vary in approaches and conclusions. An MIT Sloan study of five different ESG raters found that correlations between the ratings ranged from 0.42 to 0.73. In comparison, there is a 0.99 correlation between all of the Moody's and S&P ratings30! Therefore, in evaluation, my use of the Sustainalytics database may have yielded very different results to what I would have obtained using an alternative provider. This means that my results are just a snapshot of a specific take on ESG and should not be thought of as the only way of looking at ESG investing.

In my opinion, one should also ponder what a “higher” return indicates. It is true that the Fama & French regressions control for a number of factors but when qualitatively thinking of returns on ESG, one fails to understand that high ESG companies may be very different to the rest of the investable universe. Following on from the soft premise that ESG has outperformed the market in the last few years, what do these excess returns represent? It could well be that these excess returns are compensating the investor for higher risk, ESG companies having more inherent risk as their business models are less trialled and tested. Further, I could be omitting other variables that the higher returns are compensating.

Other omitted variable bias may also be present. For example, companies that have higher margins may be more able to afford to respect the environment, take better care of their workforce etc. Hence, in further research, I would also attempt to proxy for margins by inputting either gross or operating margins into the regression. Further, being able to care about ESG matters may be an ability that only long-serving managers and CEO’s have. Long- standing corporate stability is key for ESG; managers that are new and whos’ future depends on next quarter net income may not be able to prioritise ESG at all. Therefore, companies that score highly in ESG terms may in fact have very stable and long-serving management. In further research I would therefore include a dummy variable in the regression to proxy for stability ie. has the CEO served for more than 5 years (1 being yes and 0 being no)?

Lastly, determining the success of ESG investment strategies is very much dependant on which benchmark you use. Taking very high ESG companies in a particular country, say Spain, and comparing them to the IBEX 35 can be misleading. This is due to the fact that you may be isolating a particular industry or industries and comparing it to the market as a whole. These high ESG companies may also be smaller on average, have higher risk and volatility or other many features that don’t allow for like for like comparison. Further, there may just be two or three companies behind each sub-sector or other label that you use, making white noise inevitable.

30 Aggregate Confusion: The Divergence of ESG Ratings (F. Berg, J. F. Kölbel & R. Rigobon, 2019).

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 54

6. Conclusion

On the one hand, this dissertation reaches the conclusion that alpha is not generated using ESG scoring. Despite this, the methodology used in this dissertation is one of many, there are multiple ways to incorporate ESG into the investment process and further research should continue to address them.

On the other hand, ESG exhibits strong momentum and high ß since January 2019, making it a very attractive proposition for money managers. I posit that the ESG factor is indeed hidden in momentum and ß, considering that my portfolio is long-short, the respective regression coefficients are abnormally large. I believe that the proliferation of passive investment ESG products and large inflows into the space as more and more funds and asset managers switch their allocations towards ESG are behind my results and conclusions.

Notwithstanding, regardless of whether or not investing taking into account ESG principals covers opportunity cost or not, ESG criteria is here to stay. Governments and regulators will continue to enshrine ESG disclosure and compliance in law, making it an integral part of our micro and macroeconomy.

ESG: Cómo Incorporarlo en Gestión para Pasar del Marketing a la Realidad- Un Estudio Econométrico Factorial 55

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