Industry-adjusted ESG scores and global macroeconomic risks: evidence from factor-based portfolio strategies

This paper investigates whether industry-adjusted-ESG-integrated portfolio strategies provide superior risk-return trade-offs and distinct exposures to global macroeconomic risk factors compared to their non-ESG counterparts. Using 108 value, size, and momentum portfolios across six major equity markets from 2001 to 2023 (for a total of 27,216 returns), we evaluate performance and risk pricing through both descriptive statistics and a cross-sectional asset pricing model. Our findings indicate that ESG integration tends to not reduce average returns. More notably, ESG strategies exhibit lower volatility, especially in developed markets suggesting a potential shift toward a greater portfolio resilience. In the asset pricing tests, industrial production growth and term spread are significantly priced in both ESG and non-ESG portfolios, though ESG portfolios exhibit slightly lower estimated risk prices. Notably, the Environmental Performance Index factor is priced negatively and significantly only in non-ESG sample, indicating that weak environmental performance constitutes a priced source of systematic risk. Furthermore, the default spread is significant only in the ESG sample, possibly reflecting a greater vulnerability to credit conditions. Overall, ESG integration appears to reshape the exposure of factor-based portfolios to global macroeconomic risks not necessarily by enhancing returns but by shifting the emphasis toward risk management and sustainability alignment. These results contribute to the debate on the financial relevance of ESG investing and highlight the importance of macroeconomic context when evaluating ESG performance. The study offers valuable insights for asset managers, risk professionals, and regulators on how sustainability considerations alter portfolio risk profiles and the pricing of macro-financial risks. JEL classification: G11; G12; G15; F44