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1. Introduction
The interest of market participants in the ESG aspects of corporate policy has spurred tremendous growth in ESG investing, also known as sustainable investing. A growing number of investors are interested not only in the financial performance of investments, but also in the impact their portfolio selections may have in promoting ethical business practices, increasing diversity and accountability, improving the environment, and otherwise moving forward on societal issues. According to a recent study by Natixis Investment Managers (Avery, 2019), 7 out of 10 investors prefer to invest in companies with positive social and environmental impact, with more than 61% of retirement plan participants willing to increase contributions to their plan if the underlying companies are shown to be doing social good. More recently, the US SIF Foundation's biennial “Report on US Sustainable and Impact Investing Trends” reports that in 2020, sustainable investing totaled $17.1 trillion, an amount which has increased 42% since 2018 and now represents approximately a third of US assets under professional management (USSIF, 2020). While research on the link between ESG criteria and corporate financial performance has proliferated over the past four decades (as evidenced by Friede et al., 2015, who review more than 2,000 studies), research on the market efficiency of ESG investments is sparse.
Recent studies explore market efficiency in ESG indices and fail to detect differences between the dynamic behavior of ESG and conventional stock market indices. Caporale et al. (2021) find no significant difference in the stochastic behavior of ESG and conventional indices, using two different long memory models. Using the Hurst exponent to compare the efficiency of MSCI ESG Leader indices from 16 countries to that of MSCI Standard indices, Gregory (2021) determines that due to their composition, ESG indices are as efficient as their conventional counterparts. Along the same vein of research, Plastun et al. (2022) study price effects after one-day abnormal returns in ESG indices and their conventional counterparts, and show no statistically significant difference between the two groups. While these studies examine shorter-term return persistence in ESG indices, researchers have not yet considered other strands of the literature testing the efficient market hypothesis (EMH) such as monthly seasonality-based trading strategies involving ESG indices.
A number of studies have investigated the monthly...