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Risk-mitigating effect of ESG on momentum portfolios

Lars Kaiser (Institute for Finance, University of Liechtenstein, Vaduz, Liechtenstein)
Jan Welters (Investment Management Operations, Deloitte Consulting GmbH, Munich, Germany)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 22 October 2019

Issue publication date: 2 December 2019




Existing empirical evidence on the impact of environmental, social and governance (ESG) integration on momentum portfolios is limited. The combination of the two is relevant given the risk-mitigating effect of ESG criteria, as well as the existence of momentum crashes. As such, ESG might lend itself to reduce crash risk for momentum investors.


In this paper, the authors provide insight into the impact of an ESG-constrained investment universe on momentum returns. The overall investment universe is split into high and low ESG-rated segments to anylse the characteristics of momentum portfolios conditional on the ESG rating.


The authors document the existence of a momentum premium across European stocks and for a subset of high and lows ESG-rated stocks. However, absolute returns of momentum strategies are significantly lower if momentum strategies are pursued on a subset of high ESG stocks. Additionally, findings document a risk-mitigation effect of ESG for momentum portfolios with significantly lower returns for momentum portfolios based on low ESG stocks during periods of momentum crashes.


Research on momentum investing and the momentum premium is large and well established, yet many questions remain. A recent study by Daniel and Moskowitz (2016) has analyzed crash risk for momentum investors and identified periods of strong momentum crashes. On the other hand, the literature on ESG integration in standing investment approaches is still limited, but as demand for sustainable products is increasing, so is the demand for a better understanding of the impact of ESG integration. Consequently, the authors provide evidence on the benefits of ESG integration for momentum investors to reduce their exposure to momentum crash risk.



Kaiser, L. and Welters, J. (2019), "Risk-mitigating effect of ESG on momentum portfolios", Journal of Risk Finance, Vol. 20 No. 5, pp. 542-555.



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