The effect of corporate sustainability on stock performance : an empirical comparison between European stocks with good and bad ESG performance

Abstract

This thesis investigates the effect of corporate sustainability on financial performance in Europe during the period 2005-2017. We examine whether companies with good ESG performance perform better in the stock market than companies with bad ESG performance, based on Thomson Reuters ESG Scores. We are computing the alphas of a long-short zero investment strategy, which is long a portfolio comprised of companies with high ESG scores and short a portfolio comprised of companies with low ESG scores. By applying Fama-French three-factor, four-factor (Carhart) and five-factor model with and without momentum to account for potential differences in risk exposure between the portfolios, we find that the latter significantly outperforms the former. The differences however, disappear as we account for ESG controversies, which are the company´s involvement in media covered incidents related to ESG. Due to different results associated with the different ESG measures, a clear conclusion can hardly be made. What is certain however, is that we do not see a positive relationship between ESG and stock performance in Europe, using Thomson Reuters ESG Scores.