Revisiting the Fama-French Three-Factor Model in Sustainable Investment

Abstract

This study investigates whether the Fama-French three-factor model retains its explanatory relevance for excess stock returns, focusing on firms listed in Indonesia’s ESG Leaders Index during 2021-2023. Prior empirical studies report mixed evidence on whether sustainability screening alters the pricing of conventional risk factors. A quantitative explanatory design employing purposive sampling selects 29 firms. OLS regression is applied following sequential model specification tests. The central finding is that the firm size factor (SMB) is statistically insignificant, a result attributed to the structural concentration of large-cap firms within the ESG Leaders universe. Market risk premium exerts a positive and significant effect, confirming that systematic risk pricing persists within ESG-screened portfolios even in an emerging market setting. The book-to-market ratio (HML) also shows a positive and significant influence, demonstrating that the value premium survives sustainability screening and is somewhat larger than the coefficients reported in multi-country comparisons, suggesting that ESG screening does not suppress but may preserve or amplify the value premium. The study contributes to the asset pricing literature by demonstrating that ESG screening does not uniformly eliminate risk-factor relevance and by highlighting how index composition shapes which factors remain empirically active in sustainability-oriented markets.