This thesis analyzes the effect of positive ESG rating on stock performance. The goal is to provide an overview of the findings from the literature. Also, the thesis provides an empirical study on the ex-post stock performance of positively rated ESG firms as a contribution to the existing literature. However, a considerable issue is that ESG definitions are heterogeneous because there is none general standard in terms of content and measurement. Therefore, the validity of ESG ratings from rating agencies is reviewed.
The structure of this thesis is divided into four chapters. The first chapter introduces the concept of ESG and Corporate Social Responsibility (CSR) in detail. Secondly, ESG rating agencies are subject of debate. Mainly, the divergence in ratings among different rating agencies is analyzed because, for empirical studies, valid ratings are essential to obtain reliable results. The third chapter discusses the existing research papers regarding ESG´s influence on stock performance. It mentions the common hypotheses in this area and examines the results from previous empirical studies. At last, an empirical study, which analyzes the performance of a portfolio consisting of high rated ESG stocks, is constructed. This portfolio is compared with the broad market performance and a portfolio of weak rated ESG stocks in terms of historical returns and the Sharpe ratio.
Table of Contents
1. Introduction
2. Concept of ESG and CSR
3. ESG rating agencies
3.1 Provider and measurement
3.2 Divergence of ESG ratings
3.3 Reasons for divergence in ESG ratings
3.4 Implications of ESG rating divergence
4. Literature overview: The effect of positive ESG rating on stock performance
4.1 Theoretical background: Hypotheses in the literature about the effect of positive ESG rating on stock performance
4.2 Stock performance of positively rated ESG portfolios in empirical studies
4.3 Limitations of discussed empirical studies
5. Empirical study: Performance of a positively rated ESG portfolio
5.1 Data
5.2 Analysis of historical returns and the Sharpe ratio
5.3 Results and limitations
6. Conclusion
Objective and Research Focus
This thesis investigates the impact of positive Environmental, Social, and Governance (ESG) ratings on stock market performance. It aims to bridge the gap between academic debate on ESG effectiveness and practical market outcomes by providing both a literature review and an original empirical analysis of portfolio performance.
- Analysis of the divergence in ESG ratings among major agencies.
- Evaluation of theoretical hypotheses regarding ESG and corporate financial performance.
- Construction and backtesting of a positively rated ESG portfolio (PESG).
- Comparative performance study against a negatively rated portfolio (NESG) and the MSCI ACWI Index.
- Examination of risk-adjusted returns using the Sharpe ratio.
Excerpt from the Book
3.1 Provider and measurement
This chapter introduces ESG rating agencies and their evaluation methods. A critical analysis of ESG rating agencies is essential because empirical studies in the academic literature about ESG´s influence on stock performance or CFP are frequently based on the results of merely one rating agency.
ESG rating agencies are organizations, which measure the ESG performance of firms. There are five major ESG rating agencies, which cover a large part of the market: KLD, Sustainalytics, Vigeo-Eiris, Asset4, and RobecoSAM (Eccles and Stroehle, 2018, pp. 26-27; Berg et al., 2019, pp. 5-6). In terms of the measurement of ESG, there is not an industry-standard because rating agencies use different approaches to measure ESG performance, which is a consequence of heterogenous ESG definitions.
In general, ESG ratings among providers are positively correlated, but there is a noticeable divergence. As a result, different providers obtain non-identical results for firm evaluations (Berg et al., 2019, p. 7; Chatterji et al., 2016, p. 1597; Dorfleitner et al., 2015, p. 465).
Summary of Chapters
1. Introduction: Outlines the rise of socially responsible investing and states the research goal to analyze the effect of positive ESG ratings on stock performance.
2. Concept of ESG and CSR: Defines the pillars of ESG and the broad, heterogeneous landscape of Corporate Social Responsibility (CSR) definitions.
3. ESG rating agencies: Critically examines the providers of ESG data and identifies significant rating divergence as a major issue for empirical validity.
4. Literature overview: The effect of positive ESG rating on stock performance: Summarizes common hypotheses and empirical findings, noting mixed results ranging from neutral to positive effects.
5. Empirical study: Performance of a positively rated ESG portfolio: Details the methodology for constructing PESG and NESG portfolios and presents the comparative results of their historical returns and Sharpe ratios.
6. Conclusion: Synthesizes findings, emphasizing that while ESG portfolios performed well, the best historical performance was observed in the negatively rated portfolio, highlighting the complexity of ESG-based investment strategies.
Keywords
ESG, CSR, Stock Performance, Rating Divergence, SRI, Sharpe Ratio, Portfolio Management, Sustainability, Empirical Study, MSCI ACWI, Financial Performance, Investment Strategy, Corporate Governance, Market Returns, Asset Pricing.
Frequently Asked Questions
What is the primary focus of this research?
The thesis focuses on determining whether companies with high ESG ratings achieve superior stock market returns compared to conventional firms or negatively rated ones.
What are the core thematic areas?
The study covers ESG rating methodologies, the phenomenon of rating divergence, theoretical hypotheses connecting social responsibility to financial gains, and empirical performance testing of ESG portfolios.
What is the main research objective?
The goal is to provide a comprehensive overview of existing literature on ESG performance and to contribute a novel empirical analysis based on a consensus-driven portfolio selection method.
Which methodology is employed in the empirical study?
The author constructs portfolios (PESG and NESG) based on consistent ratings from five major agencies and compares their historical monthly returns and Sharpe ratios against the MSCI ACWI benchmark.
What does the main body of the work cover?
It covers the definition of ESG, a critical review of rating agencies, an analysis of literature hypotheses (such as "doing good while doing well"), and a detailed empirical assessment of portfolios from 2005 to 2019.
Which keywords best characterize this work?
Key terms include ESG, rating divergence, stock performance, Sharpe ratio, and sustainable investment.
Why is ESG rating divergence considered a significant problem?
Rating divergence means that different agencies assess the same firm differently, which can lead to biased results in empirical studies and poses a risk for investors relying on a single rating source.
How does the performance of the positively rated portfolio compare to the market?
The study finds that while the positively rated ESG portfolio (PESG) outperformed the broad market index (ACWI), the negatively rated portfolio (NESG) surprisingly yielded the highest returns in the analyzed period.
- Quote paper
- Anonym (Author), 2019, ESG and stock performance, Munich, GRIN Verlag, https://www.grin.com/document/981224
