A long-time interest of mine has been somehow connecting impact with finance. Since ESG investing is the fad to do that, I had to verify for myself whether ESG could be actively sought-after as a positive-alpha factor. As soon as I got an opportunity to work with Dr John Maheu, my Econometrics professor, on an Econometrics project, I sought to work on this topic.

This study explores the link between ESG scores and stock returns for a cross-section of US companies Bloomberg's aggregate ESG scores. 

Objectives

The underlying objective of this project was to see whether companies that invested more time and money in ESG efforts could earn higher returns for it, keeping all other factors constant.

The sample taken included all companies in the Russell 3000 Index, and the ESG scores under consideration were Bloomberg's proprietary BESG scores which aggregate information on all three fronts: Environmental, Social and Governance. 

Results

• Linear regression models revealed positive correlations between ESG scores and market capitalization and profit margins. 

• However, higher ESG scores are associated with lower stock returns. 

• Environmental and social scores are more significant predictors of returns than governance scores. 

These findings underscore the importance of considering ESG factors in investment decisions and offer insights for investors, companies, and policymakers. 

Additionally, you can access my research paper and the raw data to play around with at https://github.com/gurjasbatra/ESG-scores-and-stock-returns.