Graduation Year

2023

Date of Submission

12-2022

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

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Abstract

Pension funds in the United States are underfunded, and they will require outsized investment returns or cash infusions to meet future payment obligations. As such, investment decisions are of the utmost importance. In this analysis, I examine how funds’ allocations to stocks that are considered ESG friendly predict fund performance. In doing so, I find that increases in holdings that are included in ESG indices significantly increase funds volatilities while having no significant effect on returns or the Sharpe ratio. These results are marginally supported by a subsequent analysis, where I abstract a weighted average environmental risk, social risk, and governance risk score for each portfolio based on the Sustainalytics security risk scores. I find that an increased portfolio weighted average environmental risk significantly reduces portfolio volatility, but it has no significant effect on returns or the Sharpe ratio, social risk is an insignificant predictor of all three outcome variables, and governance risk significantly increases volatility while decreasing returns. However, none of the effect sizes in the weighted average risk score analysis constitute a meaningful change in outcome variables. To explain these results, I perform multiple robustness checks, finding that ESG friendly stocks are disproportionately technology and healthcare securities relative to non-ESG stocks.

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