Is there a trade-off between economic return and ESG rating?

Abstract

ESG scores have during the last 15 years been used to categorize firms by rating according to environmental, social and governance aspects. Earlier research looking at performance and ESG indicates various results for different markets, publishing dates and time frames. In this study 60 Swedish firms with an ESG rating at the start of the time frame, 2017, were divided into two portfolios, High ESG and Low ESG. Weekly returns were collected during a five-year period and used as a dependent variable when regressions were made with the four Carhart factors as independent variables. Results showed that the Low ESG outperformed High ESG but were also more volatile. None of the portfolios could be proven to beat the Swedish index market due to lack of statistical power. Graphs of the risk-adjusted cumulative returns showed that the Low ESG portfolio reached the lowest point during the beginning of Covid-19 but also the highest point a year later. The discussion interpreting the results concluded that there is a trade-off between economic return and ESG rating for Swedish companies during the time period.