The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway's Oil Fund

38 Pages Posted: 3 May 2022

See all articles by Erika Christie Berle

Erika Christie Berle

University of Stavanger - Business School

Wangwei He

University of Stavanger - Business School, Students

Bernt Arne Ødegaard

University of Stavanger

Date Written: April 15, 2022

Abstract

What are the consequences of widespread ESG-based portfolio exclusions on the expected returns of firms subject to exclusion? We consider two possible theoretical explanations. 1) Short-term price pressure around the exclusions leading to correction of mispricing going forward. 2) Long term changes in required returns. We use the exclusions of Norwegian Government Pension Fund Global (GPFG -`The Oil Fund') to investigate. GPFG is the world's largest SWF, and its ESG decisions are used as a model for many institutional investors. We construct various portfolios representing the GPFG exclusions. We find that these portfolios have significant superior performance (alpha) relative to a Fama-French five factor model. The sheer magnitude of these excess returns (5\% in annual terms) leads us to conclude that short-term price pressure can not be the only explanation for our results, the excluded firms expected returns must be higher in the longer term.

Keywords: ESG investing; Exclusion; Oil Fund

JEL Classification: G10;G20

Suggested Citation

Berle, Erika Christie and He, Wangwei and Ødegaard, Bernt Arne, The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway's Oil Fund (April 15, 2022). Available at SSRN: https://ssrn.com/abstract=4095395 or http://dx.doi.org/10.2139/ssrn.4095395

Erika Christie Berle

University of Stavanger - Business School ( email )

PB 8002
Stavanger, 4036
Norway

Wangwei He

University of Stavanger - Business School, Students

Stavanger
Norway

Bernt Arne Ødegaard (Contact Author)

University of Stavanger ( email )

UiS Business School
Stavanger, NO-4036
Norway

HOME PAGE: http://ba-odegaard.no

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