The Contributions of Betas versus Characteristics to the ESG Premium

34 Pages Posted: 20 Dec 2019 Last revised: 3 Aug 2020

See all articles by Rocco Ciciretti

Rocco Ciciretti

Tor Vergata University of Rome - Department of Economics and Finance

Ambrogio Dalò

University of Gronigen - Department of Economics, Econometrics & Finance

Lammertjan Dam

University of Groningen - Faculty of Economics and Business

Date Written: November 21, 2019

Abstract

Firms that score low on environmental, social, and governance (ESG) indicators exhibit higher expected returns. This negative ESG premium might be driven by higher risk associated with low ESG scores, or it could signal investors’ preferences for firms with high ESG scores. The first driver implies an underlying, systematic ESG risk factor, such that ESG risk factor betas explain differences in expected returns. The second driver implies that firm-specific ESG characteristics explain the ESG premium. To identify the separate contributions of ESG betas and ESG characteristics for explaining variation in expected returns, this study uses two global data sets from 2004-2018 and reveals that ESG characteristics mainly explain variation in expected returns. A one standard deviation decrease in ESG scores is associated with an increase of 13 basis points in monthly expected returns. This study also

Keywords: Socially Responsible Investment, ESG Premium, EIV Correction

JEL Classification: G11, C58

Suggested Citation

Ciciretti, Rocco and Dalò, Ambrogio and Dam, Lammertjan, The Contributions of Betas versus Characteristics to the ESG Premium (November 21, 2019). CEIS Working Paper No. 413, Available at SSRN: https://ssrn.com/abstract=3010234 or http://dx.doi.org/10.2139/ssrn.3010234

Rocco Ciciretti

Tor Vergata University of Rome - Department of Economics and Finance ( email )

Via Columbia, 2
Roma, 00133
Italy
+39 06 72595925 (Phone)

HOME PAGE: http://www.roccociciretti.com/

Ambrogio Dalò (Contact Author)

University of Gronigen - Department of Economics, Econometrics & Finance ( email )

Nettelbosje 2
Groningen, Groningen 9747 AE
Netherlands
+31 50 36 37194 (Phone)

HOME PAGE: http://https://sites.google.com/view/ambrogiodalo/home

Lammertjan Dam

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands
+31-50-3636518 (Phone)

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