Social Premiums

Abstract

While there is extensive research on governance (G) and a growing focus on environmental (E) issues, the social dimension (S) of ESG investing is still underscrutinized. Using the MSCI social scores, we find that the two main components of a firm's social score, human capital and product safety, command statistically significant (yet opposing) return premiums in the cross-section of US stocks. Specifically, stocks with a high human capital score earn higher returns, and stocks with a high product safety score earn lower returns. Consequently, the aggregate social score commands no premium as the opposing effects of its components neutralize each other. Our findings challenge the common ESG investing approach of amalgamating factors without considering their distinct, potentially contradictory, risk and return implications.

Keywords: ESG, MSCI, return predictability, risk premiums, S, social scores

JEL Classification: G11, G12, G14, M14