ESG and the Market Return
71 Pages Posted: 6 Sep 2022 Last revised: 21 Dec 2022
Date Written: December 1, 2020
Abstract
We examine the relation between firms’ environmental, social, and governance (ESG) performance and aggregate stock market returns. Based on 38 ESG scores, we construct a market-level ESG index and find its strong positive predictive power on the market returns both in- and out-of-sample, and the predictability stems from both cash flow and discount rate channels. Our findings are robust to alternative machine learning methods and to a number of controls. Our novel result of the market-wide impact of the ESG provides support for the economy-wide importance of the ESG and the associated policies.
Keywords: ESG, Return Predictability, Partial Least Square, Neural Networks, Model Complexity
JEL Classification: C22, C53, G11, G12, G17
Suggested Citation: Suggested Citation