ESG and the cross-section of expected return

Abstract

ESG is increasingly becoming a topic of interest for research and investors. While some may be interested to invest in ESG for ethical reasons, some may be more interested in capturing excess returns from this class of asset. In any case, both individuals are interested in the impact of ESG implementation on the performance of stocks. This study analyzes the impact of green scores (Environmental pillar) on stocks’ performance and shows that in Europe and using Refinitiv dataset, brown stocks tend to outperform. Following Pastor et al. (2021) methodology and using Ardia et al. (2020) climate concern index, I show that unexpected changes in investor climate concern do not have an impact on the portfolio level but positively impact green stocks’ performance at the stock level.