The effects of Environmental, Social and Governance measures on the cross section of stock return, a compensation for risk or mispricing? Evidence from the Swedish stock market

Abstract

There is a lack of uniformity throughout the literature regarding the effects of socially responsible investing. By implementing a Fama-MacBeth style regression with the Fama French three factors and the momentum factor, extended with several detailed environmental, social and governance scores the lack of uniformity of these effects are confirmed. The combined social score, the product responsibility and community scores are shown to have positive relations to stock returns, while the human rights and management scores are shown to have negative relations. Deepening the analysis, whether these effects are due to mispricing or risk, there is evidence that the combined social score is to be explained by being a risk factor while the other scores are found to be explained by mispricing.