The Greenfee of Beta - Unraveling the Impact of Sustainability on Systematic Risk
This paper unravels the impact of sustainability on systematic risk. Literature suggests that enhanced sustainability reduces companies' systematic risk, thanks to e.g. product differentiation, a broader spectrum of investors holding the assets, or simply because there exists a specific ESG factor. Aiming to complement existing literature, we zoom in on the particular forces being investment commitments and investment horizon, potentially increasing companies' systematic risk as a consequence of enhanced sustainability. We examine this empirically by constructing a proxy variable defined as the sum of R&D- and capital expenditures scaled by revenue, intending to measure the relative investment commitments and investment horizon. This proxy variable is multiplied with the companies' ESG score, forming our variable of interest. Indeed, by running a fixed effect regression model using beta as the dependent variable, we find an indication of enhanced sustainability, through higher investment commitments and a longer investment horizon, inflating the systematic risk. However, our robustness checks fail to confirm the significance of this relationship, diminishing the confidence of our results. We recognize the need for further empirical studies, continuing trying to exhaustively map the relationship between sustainability and systematic risk.