ESG and the stock market: Is ESG Exposure Systematic? 

Abstract

We study the relation between firms' environmental, social, and governance (ESG) performance and the aggregate stock market returns. Based on 38 individual ESG measures, we construct a market-level ESG index. With both the traditional predictive regression approach and two recently developed machine learning methods, we find that the ESG index has strong and positive predictive power on the market both in-and out-of-sample, and both the cash flow and discount rate channels are the economic drivers of predictability. Our results are robust to a number of controls and setups. Our novel finding on the significant market-wide impact of the ESG provides support for the economy-wide importance of the ESG risk and for the central role played by governments.