A Long–Short Strategy Based on ESG Stock Scores
Summary
The strategy ranks North American stocks by environmental, social, and governance scores, then buys the highest-scoring fifth and shorts the lowest-scoring fifth for each dimension. The stock universe covers Canada and the United States, excludes shares priced below one dollar, and uses annual score updates held constant between assessments. Returns are measured against matched benchmarks controlling for size, book-to-market, and momentum. The three score portfolios are equally weighted and rebalanced yearly.
The cited global study reports positive long-horizon abnormal returns for the combined long–short approach in North America and Europe, with stronger results in North America; it also finds substantial regional variation. The document argues that sustainability-related benefits may emerge over time, while warning that rating providers use inconsistent methods. The available source summary does not establish that the effect will persist, and the page says evidence about the strategy’s relationship to equity-market risk is unavailable, so its crisis-hedging value is unknown.
Key ideas
- Rank stocks separately by environmental, social, and governance scores, buying the top fifth and shorting the bottom fifth.
- The described universe is North American equities with available scores, excluding stocks priced below one dollar.
- Annual ESG ratings are held constant between updates, and the portfolios rebalance yearly.
- Matched benchmarks control for size, book-to-market, and momentum when calculating abnormal returns.
- Reported results vary by region, and inconsistent ESG rating methods limit generalization.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.