Responsible Investing: ESG Ratings and the Cross-Section of International Stock Returns
39 Pages Posted: 11 Oct 2021 Last revised: 10 Jan 2022
Date Written: September 12, 2021
Does socially responsible investing pay off? The investigation of 49 developed and emerging markets indicates that environmental, social, and governance ratings negatively predict future stock returns. A decile of global stocks with the highest ESG scores underperforms their low-rated counterparts by 4.68% per year. However, the superior returns on irresponsible companies are driven by the small firm effect. By buying unethical stocks, investors harvest the size premium. Once its role is isolated, the ESG companies no longer differ from their peers.
Keywords: corporate social responsibility, sustainable investing, environmental, social, and governance ratings, ESG, the cross-section of stock returns, international markets, return predictability, asset pricing, size premium, small firm effect
JEL Classification: G12, G14, G15, M14, Q01
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