A Study Of Multi-factor Stock Selection Strategies After The Inclusion Of ESG Factors

Multi-factor stock selection strategy is a classic strategy in the field of quantitative investment,which can bring considerable investment returns to investors.However,since this strategy usually uses only traditional factors such as financial performance and prices to screen stocks,but does not consider non-traditional factors that contain alternative information,the rigor of this strategy construction needs to be improved.The ESG factor portrays the performance of companies in terms of environmental protection and social responsibility,and its alternative information can compensate for the shortcomings of the traditional multi-factor stock selection strategy.Therefore,this study considers combining ESG factor with traditional multi-factor to build a multi-factor stock selection strategy that incorporates ESG factor,and investigates whether the addition of this factor can improve the performance of traditional multi-factor stock selection strategy.First,this study constructs a Top50 scoring strategy and a Top50 regression strategy based on six traditional factors,including profitability factor,solvency factor,operating capacity factor,growth capacity factor,valuation capacity factor and shareholder factor,using scoring and regression methods,respectively,to investigate the stock selection ability of the traditional multi-factor stock selection strategy.Secondly,this study tested the validity of three ESG rating factors,namely,Huazheng,Shang Dao Rong Green and SWIC,and found that the information overlap between all three ESG rating factors and traditional factors was low.This indicates the reasonableness of combining ESG factors with traditional multi-factors for stock selection.Again,this study integrates the best-performing Shang Dao Rong Green ESG rating factor of the three ESG rating factors with the traditional factors,and constructs a Top50 scoring stock selection strategy incorporating ESG factors and a Top50 regression stock selection strategy incorporating ESG factors,respectively.Finally,this study conducts backtest analysis on the above strategies and has the following findings: First,the cumulative net performance of both the Top50 stock selection strategy based on traditional multi-factor and the Top50 stock selection strategy incorporating ESG factors outperforms the CSI 300 index in the same period,which indicates that the multi-factor stock selection strategy has the ability to screen high-quality stocks.Second,after adding ESG factors to the Top50 scoring stock selection strategy and Top50 regression stock selection strategy,the performance of both improved in terms of annualized return and Sharpe ratio.This indicates that ESG factor,as an alternative data that has not been overly explored,can compensate for the stock selection shortcomings of traditional multi-factor stock selection strategies by introducing alternative information.