The Effect of ESG Risk Factors on the Investment Process
Y. Liu (TU Delft - Technology, Policy and Management)
Aleksandrina Ralcheva – Mentor (TU Delft - Economics of Technology and Innovation)
Bharosa Bharosa – Graduation committee member (TU Delft - Information and Communication Technology)
J. Hogewoning – Graduation committee member (PGGM)
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Abstract
This thesis investigates the impact of Environmental, Social, and Governance (ESG) risk factors on the risk and return dynamics of equity investment portfolios, addressing a critical gap in both academic and industry research. The study utilizes Principal Component Analysis and Fama-MacBeth regression to quantify the material impact of ESG risk factors on financial performance, integrating these factors into an extended Fama-French model for asset pricing. The findings reveal that ESG risk factors can mitigate negative impacts on investment returns, underscoring the importance of incorporating ESG considerations into investment strategies. Despite challenges such as inconsistent data quality and limitations of multi-factor models, the research contributes to the understanding of ESG integration and suggests avenues for future exploration, including the development of more precise models and the assessment of long-term effects across different market conditions.