RT Journal Article
SR Electronic
T1 Tuning Trend-Following Strategies with Macro ESG Data
JF The Journal of Impact and ESG Investing
FD PMR
SP jesg.2021.1.032
DO 10.3905/jesg.2021.1.032
A1 Christian Morgenstern
A1 Guillaume Coqueret
A1 James Kelly
YR 2021
UL https://pm-research.com/content/early/2021/10/25/jesg.2021.1.032.abstract
AB This article seeks to tilt traditional macro trend-following strategies toward countries with high Environmental, Social, and Governance (ESG) scores. The integration incorporates both ESG levels and changes (improvements or deteriorations in sustainability). Notably, the authors find that the international ESG exposure of the macro portfolios can be substantially increased without any cost in performance for both long-only and long–short portfolios. In some cases, transaction cost–adjusted Sharpe ratios can even benefit from a minor shift toward more ESG exposure.Key Findings▪ Cross-country and cross-asset momentum-based strategies are reweighted to favor countries with high or improving ESG ratings.▪ All portfolios can sustain small tilts toward sustainability without any impact on their Sharpe ratios, with up to 70% increase in ESG exposure.▪ For long-only portfolios small tilts increase the overall Sharpe ratio, while larger tilts can become detrimental.