The Nonlinear Impact of ESG on Stock Market Performance Among U.S. Manufacturing and Banking Firms

Abstract

Investing according to ESG concerns has become popular and controversial. Companies that score well on ESG concerns may attract socially conscious investors. But do ESG scores collectively and individually impact stock market performance?  This paper weighs in on this issue by analyzing the impact that changes in ESG scores have on both the excess stock market returns (alpha) and risk-adjusted returns (Sharpe ratio). We also analyze the differential impact of ESG on financial performance among U.S. manufacturing and banking firms.  Using quantile regression analysis, our results show a nonlinear relationship, characterized by a U-shaped and an inverted-U shaped relationship between ESG ratings and alpha and Sharpe ratios respectively. Moreover, we find significant differences regarding the impact of governance, environmental, and social on excess stock market returns in both industries.

Keywords: G3, G11, G12, G34