Risk, Return, and Environmental and Social Ratings

55 Pages Posted: 29 Mar 2021 Last revised: 22 Dec 2022

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Jeong Ho (John) Kim

Florida State University - Department of Finance

Jaemin Lee

Emory University - Goizueta Business School

Date Written: December 21, 2022

Abstract

We analyze the risk and return characteristics across firms sorted by their environmental and social (ES) ratings. We document that ES ratings have no significant relationship with average stock returns or unconditional market risk. Stocks of firms with higher ES ratings do have significantly lower systematic downside risk, as measured by downside beta, relative downside beta, coskewness, and tail risk beta. However, the economic magnitude of such reduction in downside risk is modest. Our results suggest that investors who derive non-pecuniary benefits from ES investing need not sacrifice financial performance.

Keywords: ESG, Corporate Social Responsibility, Downside Risk, Stock Returns, ESG Rating

JEL Classification: G12, G32, M14

Suggested Citation

Chava, Sudheer and Kim, Jeong Ho and Lee, Jaemin, Risk, Return, and Environmental and Social Ratings (December 21, 2022). Available at SSRN: https://ssrn.com/abstract=3814444 or http://dx.doi.org/10.2139/ssrn.3814444

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://fintech.gatech.edu

Jeong Ho Kim (Contact Author)

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

Jaemin Lee

Emory University - Goizueta Business School ( email )

Atlanta, GA 30322-2710
United States

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