how is the ESG factor related to traditional factors ?

This master thesis discusses ESG effect on the portfolio performance and how this factor is related to conventional factors. First, ESG-related portfolios and the ESG factor portfolio are constructed based on ESG score. Second, return, standard deviation and Sharpe ratio are calculated to present portfolio performance. Finally, 12 asset pricing models are run on the portfolio and single-stocks level. ESG factor is added into base models. We observe that the higher ESG-scored portfolio does not lead to the better return compared to the lower ESG-scored portfolio. The analysis of asset pricing models on the portfolio level shows that the ESG factor does not enhance the explanatory power of traditional models. The analysis on single stocks illustrates that ESG factor can explain expected return better higher than CMA only, but worse than MKT, SMB+HML, WML, RMW and RMW+CMA.