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Research papers on ESG investing and returns

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  1. Aggregate Confusion: The Divergence of ESG Ratings

    Florian Berg, Julian F Kölbel, Roberto Rigobón · 2022 · European Finance Review · 3,108 citations

    Abstract This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: Kinder, Lydenberg, and Domini (KLD), Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm inf

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  2. The Importance of Climate Risks for Institutional Investors

    Philipp Krueger, Zacharias Sautner, Laura T. Starks · 2019 · Review of Financial Studies · 2,954 citations

    Abstract According to our survey about climate risk perceptions, institutional investors believe climate risks have financial implications for their portfolio firms and that these risks, particularly regulatory risks, already have begun to materialize. Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although surveyed investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large.

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  3. Responsible investing: The ESG-efficient frontier

    Lasse Heje Pedersen, Shaun Fitzgibbons, Łukasz Pomorski · 2020 · Journal of Financial Economics · 1,959 citations

    We propose a theory in which each stock's environmental, social, and governance (ESG) score plays two roles: (1) providing information about firm fundamentals and (2) affecting investor preferences. The solution to the investor's portfolio problem is characterized by an ESG-efficient frontier, showing the highest attainable Sharpe ratio for each ESG level. The corresponding portfolios satisfy four-fund separation. Equilibrium asset prices are determined by an ESG-adjusted capital asset pricing model, showing when ESG raises or lowers the required return. Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing

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  5. Sustainable development, ESG performance and company market value: Mediating effect of financial performance

    Guangyou Zhou, Lian Liu, Sumei Luo · 2022 · Business Strategy and the Environment · 892 citations

    Abstract At present, more and more attention is paid to the sustainable development of enterprises. In particular, in the context of frequent financial crises and COVID‐19 pandemic, how the performance of listed companies' environmental, social, and governance (ESG) affects the company's market value has attracted widespread attention. Different from existing studies, this paper takes financial performance as a mediating variable and constructs linear regression model and mediating effect model based on analyzing the relationship between ESG performance, financial performance, and company market value and their influencing mechanism. The ESG rating data of Chinese listed companies newly deve

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  6. Inside the ESG ratings: (Dis)agreement and performance

    Monica Billio, Michele Costola, Iva Hristova, et al. · 2021 · Corporate Social Responsibility and Environmental Management · 593 citations

    Abstract We analyze the ESG rating criteria used by prominent agencies and show that there is a lack of a commonality in the definition of ESG (i) characteristics, (ii) attributes and (iii) standards in defining E, S and G components. We provide evidence that heterogeneity in rating criteria can lead agencies to have opposite opinions on the same evaluated companies and that agreement across those providers is substantially low. Those alternative definitions of ESG also affect sustainable investments leading to the identification of different investment universes and consequently to the creation of different benchmarks. This implies that in the asset management industry it is extremely diffi

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  7. The wages of social responsibility — where are they? A critical review of ESG investing

    Gerhard Halbritter, Gregor Dorfleitner · 2015 · Review of Financial Economics · 585 citations

    Abstract This paper contributes both to investigating the link between the corporate social and financial performance based on environmental, social and corporate governance (ESG) ratings and to reviewing the existing empirical evidence pertaining to this relationship. The sample used includes ESG data of ASSET4, Bloomberg and KLD for the U.S. market from 1991 to 2012. The econometrical framework applies an ESG portfolio approach using the Carhart (1997) four‐factor model as well as cross‐sectional Fama and MacBeth (1973) regressions. Previous empirical research indicates a relationship between ESG ratings and returns. As against this, the ESG portfolios do not state a significant return dif

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  8. The end of ESG

    Alex Edmans · 2022 · Financial Management · 526 citations

    Abstract ESG is both extremely important and nothing special. It's extremely important because it's critical to long‐term value, and so any academic or practitioner should take it seriously, not just those with “ESG” in their research interests or job title. Thus, ESG doesn't need a specialized term, as that implies it's niche—considering long‐term factors isn't ESG investing; it's investing. It's nothing special since it's no better or worse than other intangible assets that create long‐term financial and social returns, such as management quality, corporate culture, and innovative capability. Companies shouldn't be praised more for improving their ESG performance than these other intangibl

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  9. ESG Integration in Investment Management: Myths and Realities

    Sakis Kotsantonis, Chris Pinney, George Serafeim · 2016 · Journal of applied corporate finance · 404 citations

    The number of public companies reporting ESG information grew from fewer than 20 in the early 1990s to 8,500 by 2014. Moreover, by the end of 2014, over 1,400 institutional investors that manage some $60 trillion in assets had signed the UN Principles for Responsible Investment (UNPRI). Nevertheless, companies with high ESG “scores” have continued to be viewed by mainstream investors as unlikely to produce competitive shareholder returns, in part because of the findings of older studies showing low returns from the social responsibility investing of the 1990s. But studies of more recent periods suggest that companies with significant ESG programs have actually outperformed their competitors

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  10. Towards a more ethical market: the impact of ESG rating on corporate financial performance

    Giovanni Landi, Mauro Sciarelli · 2018 · Social Responsibility Journal · 364 citations

    Purpose This paper fits in a research field dealing with the impact of Corporate Ethics Assessment on Financial Performance. The authors argue how environmental, social and governance (ESG) paradigm, meant to measure corporate social performance by rating issuance, can impact on abnormal returns of Italian firms listed on Financial Times Stock Exchange Milano Indice di Borsa (FTSE MIB) Index, developing a panel data analysis which runs from 2007 to 2015. Design/methodology/approach This study aims at exploring whether socially responsible investors outperform an excess market return on Italian Stock Exchange because of their investment behavior, testing statistically the relationship between

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  11. Divergent ESG Ratings

    Elroy Dimson, Paul Marsh, Mike Staunton · 2020 · The Journal of Portfolio Management · 360 citations

    Responsible investors require data to underpin their stock and sector selections. Regardless of the rating agency, bond ratings for a particular issuer are broadly similar. This is not the case for ESG ratings. Companies with a high score from one rater often receive a middling or low score from another rater. This article examines the extent of, and reasons for, disagreement among the leading suppliers of ESG ratings. The weightings given to each pillar of an ESG rating also vary across agencies. Many asset managers contend that ESG ratings can help investors to select assets with superior financial prospects, and the authors therefore review the investment performance of portfolios and of

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  12. Corporate Governance, ESG, and Stock Returns around the World

    Mozaffar Khan · 2019 · Financial Analysts Journal · 268 citations

    Nonfinancial performance measures, such as environmental, social, and governance (ESG) measures, are potentially leading indicators of companies’ financial performance. In the study reported here, I drew on prior academic literature and the concept of ESG materiality to develop new corporate governance and ESG metrics. The new metrics predicted stock returns in a global investable universe over the tested period, which suggests potential investment value in the ESG signals.

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  14. ESG performance, herding behavior and stock market returns: evidence from Europe

    Nektarios Gavrilakis, Christos Floros · 2023 · Operational Research · 85 citations

    This paper tests how financial performance indicators and combined ESG score for large-cap stocks impact on stock return. In particular, we examine how market capitalization, price to book value, Sharpe ratio and ESG score of large-cap firms in Europe are related to their stock performance. We consider a panel data consisting of six European countries—Portugal, Italy, Greece, Spain, France and Germany—for the period 2010–2020. For Greek and French firms, a firm’s size tends to negatively affect its stock returns. The investors in European countries (except Italy) do not jeopardize their returns by investing in highly ESG scoring firms. We argue that the benefit of not investing in highly ESG

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  15. ESG Investing: A Statistically Valid Approach to Data-Driven Decision Making and the Impact of ESG Factors on Stock Returns and Risk

    Kamurthi Ravi Teja, Chuan-Ming Liu · 2024 · IEEE Access · 13 citations

    This study examines the impact of environmental, social, and governance (ESG) factors on economic investment from a statistical perspective, aiming to develop a tested investment strategy that capitalizes on the connection between ESG factors and financial performance. ESG investing: A statistically valid approach to data-driven decision-making (ESGI-SVADDM) investment strategy is based on a rigorous, statistically valid approach that utilizes data, math, statistics, and data science libraries to drive investment decisions, eliminating the need for personal opinions and subjectivity. The process includes establishing an investment thesis, formulating testable hypotheses (HPS), retrieving and

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  17. Performance of Equity Mutual Funds considering ESG investments, Financial Constraints, and the COVID-19 Pandemic

    T. Guimarães, R. Malaquias · 2023 · Brazilian Business Review · 11 citations

    In this paper, we analyzed the risk-adjusted performance of fUnds related to Environmental, Social and Governance (ESG-related funds), considering periods of financial constraints and the COVID-19 Pandemic. The database is comprised of3,840 equity mutual funds in the period from January/2006 to December/2020. Each year, considering daily returns, we employed the Returns-Based Style Analysis to classify each fund as an ESG-related fund or a conventional fund;all funds in the category Equities - Sustainability / Governance were also considered as ESG-related mutual funds. Using daily data, for each year, the performance was estimated based on the fourfactors model. The main results indicate th

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  19. The Impact of ESG Investing on Portfolio Performance: An Empirical Study of Emerging Markets

    D. Bhatia, D. Kumar · 2024 · Journal of Informatics Education and Research · 4 citations

    ESG investment, which stands for environmental, social, and governance investing, has become an important strategy in the global financial markets, and its applications are becoming more relevant in developing nations. This study investigates the impact of environmental, social, and governance (ESG) integration on portfolio performance in emerging markets. The study aims to accomplish three primary objectives: evaluating the performance of ESG-compliant portfolios in comparison to non-ESG portfolios; determining whether ESG factors enhance risk-adjusted returns; and identifying the challenges and opportunities associated with ESG investing. The study takes a quantitative approach, making use

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  20. Comparative Analysis of ESG-Focused DeFi Protocols and Traditional ESG Funds: Financial Performance, Transparency, and Impact Assessment

    Jude Enajero · 2024 · International Journal of Advances in Engineering and Management · 4 citations

    The intersection of Environmental, Social, and Governance (ESG) investing and decentralized finance (DeFi) introduces innovative pathways for integrating sustainability into financial markets. This study conducts a comparative analysis of ESG-focused DeFi protocols, such as KlimaDAO and Regen Network, and traditional ESG investment funds, including the Vanguard ESG U.S. Stock ETF and BlackRock Sustainable Advantage Large Cap Core Fund. Using data from March 2021 to March 2023 and quantitative methods such as ordinary least squares (OLS) regression, the study evaluates financial performance, transparency, and impact assessment. Results indicate that ESG-focused DeFi protocols provide enhanced

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  21. ESG impact on financial corporate performance and portfolio returns: evidence of Australia and Japan

    Margarita Chrissanthi Kazakakou Powaski, Carolina Daza Ordoñez, Laura Jáuregui Sánchez · 2021 · Vinculatégica · 4 citations

    Environmental, Social, and Governance investing has undergone a radical shift; companies and investors have focused on the impact of the disclosure of the practices and policies related to the environment, social responsibility, and governance in their operational strategies and investment. The purpose of this paper is to demonstrate the impact that the ESG policies have on public companies' stock returns in Australia and Japan. Accounting and market-based measures are used to determine the impact ESG practices have on stock market index returns. The annual data used is of companies from Australia's S&P/ASX Index and Japan's Nikkei 225 Index, covering the period from 2005 to 2019. Fixed effe

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  22. ESG Investing: Evaluating the Financial Performance of Sustainable Portfolios

    Dini Ayu Pramitasari · 2024 · Equator Journal of Management and Entrepreneurship (EJME) · 3 citations

    This research examines the financial performance of ESG (Environmental, Social, Governance) portfolios compared to traditional non-ESG portfolios, focusing on their returns, volatility, and risk management. A qualitative approach was employed, utilizing a literature review and analysis of historical data from ESG reports and financial databases, particularly the FTSE4Good Index. The findings indicate that ESG portfolios significantly outperform traditional investments, with an average annual return exceeding conventional portfolios by approximately 4.3%. Additionally, ESG portfolios exhibit lower volatility and reduced drawdowns during market downturns, demonstrating their resilience and ris

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  23. Non-Financial Factors and Financial Returns: The Impact of Linking ESG Metrics to Executive Compensation on Corporate Financial Performance

    Tengteng Ding, Yiqiang Zhou, Lianghua Chen · 2025 · Sustainability · 3 citations

    Although the practice of linking Environmental, Social, and Governance (ESG) metrics to executive compensation (ESG compensation) has become increasingly common worldwide, consistent evidence of its economic consequences for corporate value remains limited. Drawing on agency theory and a sustainable governance perspective, this study examines how responsibility-oriented incentive mechanisms translate into corporate financial performance. Using textual data from a large sample of Chinese listed companies and employing the BERT deep learning model for empirical analysis, the results show that ESG compensation significantly improves subsequent financial performance. Further analysis reveals tha

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  24. Impact of ESG (Environmental, social, and governance) investing on financial performance in Bangladesh

    Tamim Forhad Shuvo, M. Habib · 2025 · Supply Chain Research · 2 citations

    Environmental, Social, and Governance (ESG) practices have become increasingly important in driving sustainable and resilient financial performance, particularly in emerging markets like Bangladesh. This study examines the impact of ESG integration on both financial and non-financial outcomes across key sectors, including banking, textiles, energy, and telecommunications. Using a mixed-methods approach, it combines quantitative analysis of return metrics, volatility, and higher-order statistical moments with qualitative insights from ESG disclosures and corporate case studies. The results show that ESG-compliant firms consistently outperform traditional counterparts, demonstrating higher ret

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