Green Investments - Better Business? A Study on the Effect of ESG on Stock Returns on the European Market

Abstract

This study examines whether there is a causal relation between ESG scores and stock returns. To investigate this an OLS-regression has been made using data collected from companies all over Europe. The chosen years for the study is 2014-2018 to avoid potential biases due to the Covid-19 pandemic. To isolate the effect of ESG scores some control variables were added to the regression. In total five regressions were made starting with only ESG and return, and then gradually incorporating more variables. In all of the regressions ESG score were statistically significant implying there is a causal relation between ESG scores and stock returns. However, since the coefficient of ESG in most of the regressions were negative and had a value of almost zero, the impact in practice is almost non-existing. This could be explained by the signaling approach which refers to the fact that ESG works as a symbol rather than giving financial value. Another potential explanation to the result could be found within the efficient market hypothesis, which suggests all available information, including ESG data, should already be included in the market price. However, since it has been established that there is a causal relation between ESG and return it could indicate a relation to the semi-strong form of EHM.