Outperformance through Investing in ESG in Need

Abstract

To maximize their effectiveness, environmental, social, and governance (ESG) strategies should target those ESG firms that are most capital constrained. Inherently, this involves seeking ESG firms that have irrationally high costs of capital and thus high expected return. We replicate results that find returns among ESG firms that are similar to those among non-ESG firms. In addition, we find that sorting stocks based on cost of equity capital generates significant positive return for both ESG and non-ESG firms. Investing in an ESG in Need index, which contains only high-ESG companies and tilts toward firms with high cost of capital, thus generates both higher social value and better return than investing in traditional capitalization-weighted ESG indexes.

The effect of sustainable business practices on profitability. Accounting for strategic disclosure

“…La Torre et al (2021), using a panel of European banks listed in STOXX Europe 600 from 2008 to 2019, find no relationship between ESG practices and account‐based performance. Several other studies indeed find nonsignificant relationships, adding complexity to the puzzle (Chih et al, 2010; Gilley et al, 2000; Hsu et al, 2018; Humphrey et al, 2012; Surroca et al, 2010). The vast and growing literature tackling the relationship between sustainable practices and profitability has taken advantage of a substantial increase in the availability of ESG data (Kotsantonis et al, 2016).…”

“…The direction of the relationship changes when using a sample of firms operating in developed countries. Buallay (Chih et al, 2010;Gilley et al, 2000;Hsu et al, 2018;Humphrey et al, 2012;Surroca et al, 2010). The vast and growing literature tackling the relationship between sustainable practices and profitability has taken advantage of a substantial increase in the availability of ESG data (Kotsantonis et al, 2016).…”

Does excluding sin stocks cost performance?

“…Moreover, the empirical findings are mixed (e.g. Hsu et al 2018, find no significant relation between ESG scores and subsequent returns), the available data history for ESG is relatively short (starting in the mid-2000s or later), the correlation between ESG scores from different providers is low (Berg, Kölbel, and Rigobon 2019;Dimson, Marsh, and Staunton 2020), and there are concerns about ESG data having been rewritten (Berg, Fabisik, and Sautner 2020).…”

Business Model of Sustainable Robo-Advisors: Empirical Insights for Practical Implementation

“…Based on the discussion concerning the achievement of returns in the context of sustainability, numerous scientific studies question the singular financial consideration of returns from sustainable investments on different levels [24][25][26][27][28][29]. One exemplary research work from Xie et al (2018) investigates the connection between corporate efficiency and sustainability.…”