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Empirical evidence of the relation between ESG performance and financial returns
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Orientador(es)
Resumo(s)
Investor’s interest in Environmental, Social and Governance (ESG) factors has been increasing in recent years. However, if at first many investors and companies seek to be aligned with such principles only to show they were, nowadays more and more see the potential financial benefits of taking ESG criteria into consideration. The idea that companies’ efforts to become more sustainable reduce the future prospects of growth is based on mainly unjustified assumptions.
In this sense, the aim of the present research is to enlighten investors about the financial gains that may arise from including ESG criteria in the investment decision process.
Since this is a significantly new topic among financial studies, an introduction to the asset class is of foremost importance. Then, based on former literature review and driven by historical performance analysis and portfolio evidence, empirical results were computed.
Based on MSCI data, and making a separation between Emerging and Developed countries, portfolios of stocks that perform good (best-in-class) and bad (worst-in-class) in terms of ESG were built and analyzed against both their respective benchmarks and the Fama-French (FF) three factor model. The aforementioned portfolios of stocks that have high and low ESG ratings were quarterly rebalanced so that each quarter the companies integrating the portfolios are the best ESG performers.
The best-in-class portfolios yielded an annualized return (from 2007 to 2017) of 11.7% for EM and 5.4% for DM, outperforming the benchmarks that returned 2.6% and 1.9% respectively. Throughout the analysis, the results for EM were always more significant.
Regarding the regressions against the FF three factor model, and with the goal of finding abnormal returns, the best-in-class portfolios generated a positive alpha (significant for EM) while for the worst-in-class this variable was negative (as one was expecting). Also, is was considered to be important to include the Momentum factor in order to see if there was a part of the portfolios’ returns that could be explained by this extra factor. The results achieved were ambiguous and more useful for Developed Markets portfolios.
Finally, and as a supplement analysis, an long/short strategy that buys the best ESG performers and sells the worst ESG performers was analyzed. It yielded positive significant abnormal returns.
Descrição
A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics
Palavras-chave
Financial markets ESG Abnormal returns Emerging markets