EXPLORING THE RELATIONSHIP BETWEEN ESG DISAGREEMENT AND STOCK RETURNS - AN EMPIRICAL ANALYSIS

Abstract

During the recent years investors shifted their preferences towards sustainable stocks and funds, increasing the importance of Environmental, Social and Governance ratings. At a similar pace the related literature started to develop shedding light on some crucial aspects of the ESG ratings, such as the disagreement between rating agencies and the lack of common methodologies to assess the ratings. This study makes a step forward, breaking down the relation between ESG ratings disagreement and stock returns. With only two datasets at disposal, provided by Morningstar and Refinitiv, the disagreement measure between the ratings is represented by the difference in absolute value between the ratings. After sorting the stocks each month based on the disagreement measure, a portfolio and stock analysis is conducted. The Fama and French 5-factor model and a two-sample t-test are employed to examine the existence of abnormal returns in the context of ESG disagreement. The results suggest that there is no advantage in investing in stocks with higher ESG rating disagreement; however, investing in a portfolio based on stocks with lower ESG disagreement will yield higher cumulative returns.