The Relationship between Environmental Social Governance Factors and Stock Returns

Abstract

The focus by investment practitioners on the impacts of non-traditional environmental and governance issues has intensified in recent times as a result of global events. This paper examines the relationship between environmental social governance (ESG) factors and financial performance of US listed companies by considering not only impacts on stock return but also stock valuation and operating performance. Using a multifactor framework, this study provides evidence of a significant positive relationship between particular ESG rating criteria and both return on assets and market to book value measures, supporting the stakeholder theory that Corporate Social Performance (CSP) is positive for Corporate Financial Performance (CFP). Analysis also shows that employment conditions are a more relevant influence than other stakeholder criteria and a company’s involvement in more general non-stakeholder related social issues contributes negatively to both operating performance and stock return.

Keywords: SRI, Stock Returns

JEL Classification: G11, G34