How Sustainability is Disrupting Value and Momentum Investing—And What It Means for Your Portfolio

A Data-Driven Approach to Merging Sustainability with Value and Momentum Strategies

TLDR: Value and momentum investing are foundational strategies in finance, but both are being disrupted by the rising importance of sustainability. ESG data is no longer a niche factor; it’s deeply integrated into business performance, influencing risk and returns. By leveraging data-driven insights, financial analysts can enhance both strategies. Sustainability is not just a trend—it’s reshaping how investors assess companies, making ESG performance crucial for minimizing risk and maximizing returns in modern portfolios. This article will teach you how to incorporate ESG into value and momentum investing effectively.

Sustainability is changing how value and momentum investing are done. Image generated with Leonardo AI

Value- and momentum investing have been foundational strategies for financial professionals seeking to balance risk and return. Value investors traditionally focus on company fundamentals, while momentum investors capitalize on stock trends. Value investing therefore involves buying undervalued companies and selling overvalued ones. Momentum investing means buying stocks when there is an uptick in price or a history of consistent gains, and selling them when the price seems to be trending down.

These approaches have long served as basic strategies for portfolio management (although it is worth noting that one and the same portfolio would typically be managed with only one of the above strategies). However, as sustainability emerges as a critical factor, financial analysts must also account for Environmental, Social, and Governance (ESG) considerations. Whatever the trends of the day and the political sentiment about this topic; fact is that sustainability has become deeply embedded in and intertwined with business performance. Sustainability is today viewed as tool to mitigate short- to mid-term risks, and also as a key driver of long-term value creation.

Increasingly, ESG factors are influencing how companies are evaluated, presenting new opportunities for financial professionals to refine their models. This is going well beyond traditional ESG scoring systems; in fact, these days ESG factors can be embedded deeply into financial analyses. This has effects both on value- and on momentum investment strategies.

In the following piece, we will cover how sustainability data affects value investing and momentum investing in different ways. Combined strategies will also be addressed. Many of these approaches are still in their infancy; this article shall serve as an inspiration to further develop existing methodologies at leading financial institutions.

Value Investing - A Fundamental Approach

Value investing focuses on identifying companies whose stock prices do not reflect their true intrinsic value. Investors evaluate these companies based on financial ratios, earnings, and long-term growth potential, with the goal of finding undervalued assets that will appreciate over time. This approach relies heavily on a company's financial health and market conditions. Increasingly, however, sustainability performance data is becoming a critical factor to consider alongside financial fundamentals.

With Environmental, Social, and Governance (ESG) factors integrated into valuation models, financial analysts gain a more holistic view of a company’s potential risks and opportunities. For example, companies with high environmental risks, such as those in the energy or manufacturing sectors, may appear undervalued based on traditional financial ratios, but ESG data can reveal underlying risks related to regulatory changes, environmental damage, or reputational harm. On the other hand, companies that actively manage their sustainability impact—by reducing carbon emissions or improving working conditions—can see positive shifts in their valuations as they attract ESG-conscious investors and mitigate long-term risks.

An interesting example Ørsted, a Danish company that transformed itself from one of Europe’s most fossil fuel-dependent energy companies to a global leader in renewable energy. By shifting its focus to offshore wind farms and clean energy technologies, Ørsted saw a significant positive shift in its valuation in 2021. The company’s commitment to sustainability had made it a favorite among ESG-conscious investors, and its market performance has reflected strong long-term growth as the world increasingly shifts to renewable energy solutions.

Since then, however, its stock price has trended downward due to supply chain disruptions, rising commodity prices, and rising interest rates. The rising anti-ESG sentiment of the past few years contributed, too. It is now trailing and faces huge potential upside, according to analysts. In other words, buy now.