Empirical evidence of the relation between ESG performance and financial returns

Anjos, FernandoAlcoforado, José Frederico de Paiva2018-04-272021-01-202018-01-20http://hdl.handle.net/10362/35448Investor’sinterestinEnvironmental,SocialandGovernance(ESG)factorshasbeenincreasinginrecentyears.However,ifatfirstmanyinvestorsandcompaniesseektobealignedwithsuchprinciplesonlytoshowtheywere,nowadaysmoreandmoreseethepotentialfinancialbenefitsoftakingESGcriteriaintoconsideration.Theideathatcompanies’effortstobecomemoresustainablereducethefutureprospectsofgrowthisbasedonmainlyunjustifiedassumptions. Inthissense,theaimofthepresentresearchistoenlighteninvestorsaboutthefinancialgainsthatmayarisefromincludingESGcriteriaintheinvestmentdecisionprocess. Sincethisisasignificantlynewtopicamongfinancialstudies,anintroductiontotheassetclassisofforemostimportance.Then,basedonformerliteraturereviewanddrivenbyhistoricalperformanceanalysisandportfolioevidence,empiricalresultswerecomputed. BasedonMSCIdata,andmakingaseparationbetweenEmergingandDevelopedcountries,portfoliosofstocksthatperformgood(best-in-class)andbad(worst-in-class)intermsofESGwerebuiltandanalyzedagainstboththeirrespectivebenchmarksandtheFama-French(FF)threefactormodel.TheaforementionedportfoliosofstocksthathavehighandlowESGratingswerequarterlyrebalancedsothateachquarterthecompaniesintegratingtheportfoliosarethebestESGperformers. Thebest-in-classportfoliosyieldedanannualizedreturn(from2007to2017)of11.7%forEMand5.4%forDM,outperformingthebenchmarksthatreturned2.6%and1.9%respectively.Throughouttheanalysis,theresultsforEMwerealwaysmoresignificant. RegardingtheregressionsagainsttheFFthreefactormodel,andwiththegoaloffindingabnormalreturns,thebest-in-classportfoliosgeneratedapositivealpha(significantforEM)whilefortheworst-in-classthisvariablewasnegative(asonewasexpecting).Also,iswasconsideredtobeimportanttoincludetheMomentumfactorinordertoseeiftherewasapartoftheportfolios’returnsthatcouldbeexplainedbythisextrafactor.TheresultsachievedwereambiguousandmoreusefulforDevelopedMarketsportfolios. Finally,andasasupplementanalysis,anlong/shortstrategythatbuysthebestESGperformersandsellstheworstESGperformerswasanalyzed.Ityieldedpositivesignificantabnormalreturns.engFinancial marketsESGAbnormal returnsEmerging marketsEmpirical evidence of the relation between ESG performance and financial returnsmaster thesis201861852