Can ESG factors be considered as a systematic risk factor for equity mutual funds in the Eurozone?

During the last decade, there has been a growing interest in socially responsible investment practices, particularly with Environmental, Social and Governance (ESG) factors. This trend is due to a shift both in investment practices and in the motivation of investors. The latter want to have a larger scope of analysis by using non-financial information to complement traditional financial data. The link between ESG factors and financial performance is well documented in the literature. However, a clear conclusion is yet to be found. The objective of the present thesis was to investigate whether ESG factors can be considered as a systematic risk factor. To do so, a proxy of an ESG-related factor was combined with the five factors of the Fama and French (2015) model. These factors are: broad-market-related factor, capitalization-related factor, valuation-related factor, profitability-related factor and an investment-related factor. A time-series regression was performed on the returns of an equally weighted portfolio, formed by 556 equity mutual funds originating from the Eurozone, for the period from May 2010 to November 2019. Empirical findings include the fact that the risk exposure to the ESG-related factor is significantly different from zero and that equity mutual funds, originating from the Eurozone, tend to hedge this risk. It was also found that, when splitting the sample period in two, the ESG-related risk factor was only significant during the second half of the period which implies that hedging the ESG-related systematic risk has become prevalent over time. Finally, it was discovered that, funds of small size and funds that focus on picking small cap and value stocks are the ones that hedge the most for the ESG-related systematic risk factor.