THE EFFECT OF ECONOMIC AND CLIMATE POLICY UNCERTAINTIES ON MOMENTUM STRATEGIES ACROSS DIFFERENT ESG LEVELS

Abstract

This paper investigates the profitability of ESG momentum strategies and their sensitivity to economic and climate policy uncertainty in NASDAQ and NYSE markets between 2011 and 2023. Momentum portfolios are formed by ranking firms on past returns within high- and low-ESG groups, and performance is evaluated using the Fama-French three-factor model.
The results confirm the presence of momentum profits, but primarily in low-ESG and low-governance firms, where weaker transparency and governance allow price trends to persist. High-ESG portfolios exhibit weaker or insignificant momentum effects. Importantly, when Economic Policy Uncertainty (EPU), Climate Policy Uncertainty (CPU), and their interaction are introduced, momentum alphas become insignificant. This indicates that abnormal returns are better understood as compensation for policy-related risks rather than unexplained anomalies. Decomposed analysis shows that forecast disagreement is the most influential component of EPU, with CPU amplifying its effect particularly in low-ESG and low-governance universes. News-based uncertainty matters only when combined with CPU, while CPI and Tax components remain largely irrelevant. Overall, the findings bridge sustainable finance and uncertainty literature, showing that ESG momentum profits are systematically linked to structural macroeconomic and climate policy uncertainties.