Drawing Up the Bill: Are ESG Ratings Related to Stock Returns Around the World?
Results from a global study suggest that ESG investing did not systematically affect investment performance during the past two decades.
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- There is little evidence to suggest that ESG ratings are systematically related to global stock returns. This finding obtains across different regions, time periods, ESG (sub)ratings, ESG momentum, ESG downgrades and upgrades, and best-in-class strategies.
- The lack of an ESG-return relation implies that ESG investing has not lowered the cost of capital for strong ESG firms and has not come at the expense of investment performance over the past 20 years.
Mathijs van Dijk, Erasmus University, Rotterdam School of Management
Some of the key statements quoted from the paper (refer to the ESG Research section)A popular view in both academic research and the financial industry is that investors can “do
well while doing good.”"Yet, there are reasons to be skeptical about a consistently positive relation between ESG and
stock returns. First, many underlying studies are limited in scope. They use ESG ratings from
a single provider, even though there can be considerable differences across providers."
"First, many underlying studies are limited in scope."
Second, several prominent papers indicate that sustainability may be inversely related to stock
returns, in line with
theoretical predictions. In a recent literature review, Liang and Renneboog (2021) thus conclude that “there is still
no consensus about [whether] ESG-based investing helps or hurt performance.”
Abstract
We provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers. We find very little evidence that ESG ratings are related to global stock returns between 2001 and 2020. This finding obtains across different regions, time periods, ESG (sub)ratings, ESG momentum, ESG downgrades and upgrades, and best-in-class strategies. We further find little empirical support for prominent hypotheses from the literature on the role of ESG uncertainty and of country-level ESG social norms, ESG disclosure standards, and ESG regulations in shaping the relation between ESG and global stock returns. Overall, our results suggest that ESG investing did not systematically affect investment performance during the past two decades.
Refer to more details on the research paper here.