Design and performance analysis of an equity ESG best-in-class fund in the Philippine stock market

• Main Author: Espinoza Lafuente, Pablo Cesar
• Format: text
• Language: English
• Published: Animo Repository 2022
• Subjects: Equity—Philippines; Stock price indexes—Philippines; Sustainable development—Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etdm_finman/7; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1007&context=etdm_finman
• Institution: De La Salle University

ESG, despite having its detractors and drawbacks along the way, has accelerated a widespread acceptance in the investment industry in recent times and a conviction that its issues impact financial performance, principally over the long run, given the evidence of a positive relationship with corporate financial information, reduction of idiosyncratic risk, and aggregation of value to the firm in recent studies. This study examined the risk-adjusted returns of an ESG Equity Fund in the Philippines from May 31, 2011 to May 31, 2021 in comparison to its benchmark through a Single-Index-Model evaluation, and the relationship of ESG Factors with the fund’s returns through the Fama-Macbeth Regression model (FMB). The fund was designed through an ESG Best-in-Class screening approach under the premises of a rescaled range analysis and Hurst coefficient filtration process and was rebalanced on an annual basis and under special circumstances primarily associated to the ESG risk exposure of the fund’s constituents. The final allocation and selection of assets at each rebalancing were performed via the optimization method of Sequential Quadratic Programming (SQP) through Python’s Pandas, SciPy, and other packages. Financial and ESG information was sourced from data providers Refinitiv and RepRisk. The findings of the study revealed outperformance over the long term, strong beta, and positive coefficients for the fund’s alpha and its ESG Factors, however – in line with similar studies, the alpha and ESG Factors regressed lacked statical significance across the periods observed.