ESG Portfolios and Stock Returns: An analysis of ESGs effect on financial performance

Abstract: In recent years sustainable investment has increased enormously, and firms that are considered to have high social responsibility has gained interest from investors. However, if these firms have higher financial performance or not is still unclear, and researchers still have split opinions on the relationship. The purpose of this research is to analyze this relationship, with data collected from the S&P 500 with a period of 2002-2017. Using the ASSET 4 Environmental, Social, and Governance (ESG) score to conduct a panel data regression and a Fama-French Factor-Five study, with constructing different portfolios on the ESG score. Results indicate that a portfolio constructed on the low ESG score outperforms the portfolio with high ESG score, through both higher Sharpe ratio and the portfolio with high ESG has negative abnormal returns. Another interesting result is that the Financial Crisis of 2008-2009 disrupted the ESG portfolios, from changing their performance and the significance of ESG effect on stock performance.