Does ESG Matter in Controversial Industries? Evidence From Aerospace and Defense

Abstract

This paper investigates whether Environmental, Social, and Governance (ESG) scores affect risk-adjusted stock returns and market resilience within the Aerospace and Defense (A&D) industry. The study addresses a gap in existing research, as industries like A&D are often excluded from ESG-focused studies due to their controversial nature, despite becoming an increasingly integral part of social stability following recent geopolitical instability. We expand upon previous literature by employing a panel regression approach over the period 2016-2023, and divide this period into four sub-periods. We assess both individual ESG scores E, S and G, and a composite score. Our results indicate that ESG scores do not consistently explain differences in risk-adjusted returns or return volatility. Only a weak statistical relationship could be established, indicating that higher ESG performance is associated with lower risk-adjusted returns. No significant effect on return volatility was found during the COVID-19 pandemic, challenging the notion that ESG provides resilience during market turbulence. This paper contributes to the literature by providing new evidence from the A&D sector, while also reaffirming the broader challenge of establishing clear and consistent relationships between ESG scores and financial performance.