The Hidden Risks of ESG Conformity - Benefiting from the ESG Life Cycle

36 Pages Posted: 2 Aug 2019 Last revised: 5 Aug 2019

See all articles by Ralf Conen

Ralf Conen

Otto Beisheim School of Management (WHU)

Stefan Hartmann

ARC Resonsible Investment

Date Written: June 30, 2019


This paper investigates the relationship between ESG scores and stock prices. Further to previous research we add ESG revisions to the overall level of ESG scores. We propose an ESG life cycle framework, which we decompose into four clusters. Each of these clusters exhibits different characteristics with respect to ESG scores and their influence on stock returns. We find that holding portfolios solely tilted towards absolute ESG scores bears significant ESG related performance risks. In an event-study setting, we find that markets react to ESG improvements of top ranked firms with negative abnormal returns. Similarily, second-tier firms experience significant negative abnormal returns when ESG ratings are declining. Adding revisions offers a deeper insight into the return – and risk dynamics of ESG related portfolios. Not only the level of ESG scores, but also the position within the ESG cycle is of special relevance to the portfolio’s return. ESG minded investors should consider the combination of both aspects when making portfolio decisions.

Keywords: ESG, ESG investing, ESG funds, stock returns, sustainability, SRI, portfolio management, investment cycle

JEL Classification: G11, G12, G14, G32

Suggested Citation

Conen, Ralf and Hartmann, Stefan, The Hidden Risks of ESG Conformity - Benefiting from the ESG Life Cycle (June 30, 2019). Available at SSRN: or

Ralf Conen (Contact Author)

Otto Beisheim School of Management (WHU) ( email )

Burgplatz 2
Vallendar, 56179

Stefan Hartmann

ARC Resonsible Investment ( email )

96 Corniche Fleurie
Nice, 06200
06200 (Fax)

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