Responsible Investing: ESG Ratings and the Cross-Section of International Stock Returns

39 Pages Posted: 11 Oct 2021 Last revised: 10 Jan 2022

See all articles by Nusret Cakici

Nusret Cakici

Fordham university

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business

Date Written: September 12, 2021

Abstract

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

Suggested Citation

Cakici, Nusret and Zaremba, Adam, Responsible Investing: ESG Ratings and the Cross-Section of International Stock Returns (September 12, 2021). Available at SSRN: https://ssrn.com/abstract=3922312 or http://dx.doi.org/10.2139/ssrn.3922312

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

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