Market Risk Premium and ESG Risk

30 Pages Posted: 12 Apr 2024

See all articles by Daewoung Choi

Daewoung Choi

University of Washington, Bothell

Yong Kyu Gam

University College Dublin (UCD)

Yong Hyuck Kim

California State University Long Beach, Department of Finance

Dmitriy Muravyev

Michigan State University - Department of Finance; Canadian Derivatives Institute

Hojong Shin

California State University, Long Beach

Date Written: March 17, 2024

Abstract

We study the impact of market-wide environmental, social, and governance (ESG) risk on the equity risk premium. We construct an aggregate ESG risk index, consolidating firm-level ESG risk scores from 2010 to 2022. Using the index, we identify days with large increases in aggregate ESG risk (“ESG days”), about 14 days per year. We find a strong positive correlation between the stock market beta and average returns on ESG days. Specifically, the market risk premium is 0.315% on ESG days, in stark contrast to the -0.014% premium on non-ESG days. These findings are consistent across model specifications and test portfolios. The results suggest that ESG risk is systematic and priced.

Keywords: ESG, Market Risk Premium

JEL Classification: G10, G12

Suggested Citation

Choi, Daewoung and Gam, Yong Kyu and Kim, Yong Hyuck and Muravyev, Dmitriy and Shin, Hojong, Market Risk Premium and ESG Risk (March 17, 2024). Available at SSRN: https://ssrn.com/abstract=4762314 or http://dx.doi.org/10.2139/ssrn.4762314

Daewoung Choi

University of Washington, Bothell ( email )

18115 Campus Way NE
Bothell, WA 98011
United States

Yong Kyu Gam

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Yong Hyuck Kim (Contact Author)

California State University Long Beach, Department of Finance ( email )

1250 Bellflower Blvd.
College of Business, COB 200, CSULB
Long Beach, CA 90840
United States

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

Hojong Shin

California State University, Long Beach ( email )

1250 Bellflower Boulevard
Long Beach, CA 90840
United States
562.985.7996 (Phone)

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