Alpha enhancement in global equity markets with ESG overlay on factor-based investment strategies

Studies show that companies with a strong Environment, Social and Governance (ESG) profile are more competitive than their peers, as they use resources, human capital innovation efficiently. High ESG-rated have lower exposure to systematic risk factors low expected cost of capital, leading higher valuations in DCF model framework. They typically transparent, particularly respect exposures, management governance standards better long-term vision. The paper finds Alpha can be harvested by restricting investment the ESG theme combined various style characteristics, display idiosyncratic tail risks. It shows an overlay on such factor-based strategies, ‘multi-factor’, ‘value’ ‘low volatility’ order, reduces both risks further. ‘quality’ factor provides highest return among target indices, however, underlying even excess return. These findings provide some insight enhancement investors investing global equity markets.