ESG and Returns - A quantitative study of ESG scores and US stock returns across 21 years

Abstract

ESG scores have been used for the past decades to determine whether to invest in an asset or not. This is due to an increased awareness and consideration of how firms relate to the environmental, social, and governance questions. In this study, hundreds of firms were chosen out of criteria for ESG combined score amongst US firms and divided into two portfolios, High-ESG and Low-ESG, based on top- & bottom 10% ESG scoring respectively. These portfolios were compared based on monthly returns for the period 2002-2022, which was the basis for the dependent variable. The independent variables were selected from the Fama-French 5-factor model. Results showed that the Low-ESG portfolio significantly outperformed the High-ESG portfolio, and that both portfolios outperformed the US stock market. In terms of risk-adjusted returns, the Low-ESG portfolio also outperformed across the same period. The lowest points occurred during the dot-com bubble in 2002 for both ESG portfolios, while the market comparison reached a low point during the 2008 financial crisis. The conclusion reached after the discussion was that the Low-ESG portfolio was found to have higher overall returns compared to the High-ESG portfolio and the US stock market during the selected period.