Stock returns in relation to environmental, social and governance performance: mispricing or compensation for risk?

Abstract

Using detailed data on seven environmental, social and governance (ESG) attributes for a long panel of large publicly traded U.S. rms during July 1992-June 2008, this study nds that only the community indicator has a positive impact on stock returns and furthermore this e ect is due to mispricing. Additionally, we document a changing e ect of employee relations from positive to negative between July 1992- June 2003 and July 2003- June 2008. The positive impact is found to be due to mispricing, but for the negative impact there is some weak evidence that it is compensation for low non-sustainability risk. A negative impact of human rights and product safety indicators on stock returns in the more recent period has also been found to be due to mispricing. The implications of this study are that certain ESG issues (employee relations in particular) could be priced as risk factors as soon as there is higher information availability for those ESG attributes.