A Conceptual Framework to Test the ESG Portfolio-Level Performance Hypothesis

Abstract

The core motivation for this research is to provide more clarity over the investment merits of environmental, social and government (ESG) portfolios and to reduce uncertainty for financial market participants by helping them to correctly price ESG information for their capital allocation decision. This clarification is ultimately needed as world-wide initiatives have channelled significant amounts of resources towards government supported projects, all assuming there is a causal and positive link between a company’s level of sustainability and its portfolio-level ESG performance. Based on the large body of literature we develop a theoretically well supported and novel conceptional framework to reliably test the strongly advocated superior ESG performance claim. By incorporating three bodies of theory, our framework enables a new ESG asset pricing hypothesis which combines the latest scholarly findings from corporate social responsibility (CSR) performance theory, ESG investor theory and ESG asset pricing theory. In stark contrast to the long history of inconclusive scholarly outcomes, our approach opens a new pathway to overcome the intense debate in which competing interests negotiate over empirical facts. Empirical research building on this novel model is expected to yield highly conclusive outcomes which will potentially allow to close the current gap in the ESG performance literature.

Keywords: ESG, SRI, ethical investing, sustainable investing, portfolio-level ESG performance

JEL Classification: C12, G11, G12, G14