Towards Green Alpha : Analyzing ESG Exposures Through a Factor Lens

Using data on 1,312 US equity active mutual funds with $3.9 trillion in AUM, we analyze the link between funds' “bottoms up” holdings-based environmental, social, and governance (“ESG”) scores and funds' active returns, style factor loadings, and alphas. We find that funds with high ESG scores do have different profiles of factor loadings than low-scoring ESG funds. In particular, funds with high Environmental scores tend to have high quality and momentum factor loadings. In partitioning the ESG scores into components that are related to factors (Factor ESG) and idiosyncratic components (Idiosyncratic ESG), we find strong positive relations between fund alphas and Factor ESG scores