The investment implications of sustainable investing

Abstract

We examine the investment implications of three common approaches to sustainable investing. Specifically, we analyze whether implementing sustainability restrictions using SDG scores, ESG ratings, and carbon emissions data affects diversification, factor premiums, and factor exposures of investment portfolios. Our findings indicate that sustainable investing offers similar diversification as unrestricted investment portfolios, and does not affect factor premiums and exposures in the long run per se. While applying sustainability exclusions using SDG scores and carbon emissions data can be effective in avoiding investments in stocks on exclusion lists and sin stocks, applying exclusions using ESG data is not. Our findings have practical relevance in the context of the current debate on the investment implications of sustainable investing.