Responsible investments : exploration of investor motives and ESG stock market performance

Abstract

This master thesis contributes to existing research on responsible investments in two ways. Not only do we study the performance of responsible investments, but also responsible investment behaviour. Therefore, our first objective is to analyse the stock market performance of responsible investments through examining the performance differences between high rated and low rated ESG companies. Secondly, this master thesis aims to investigate responsible investment behaviour through exploring investor motives to invest responsibly. With regards to the first objective of this master thesis, we study the relationship between ESG scores and stock market performance for 1167 companies constituting the MSCI World Index for the period of 2014 to 2019. We find no significant difference in riskadjusted historical performance between high and low rated ESG companies. This is evidenced with alphas that are not significantly different from 0, when controlling for risk factors with the CAPM single-factor, Fama-French three-factor and Carhart four-factor model. We find a significant difference with respect to risk premium when being exposed to high ESG big market cap companies and low ESG big market cap companies with the former having a higher risk premium than the latter. This empirical analysis is based on ESG scores from Sustainalytics ESG rating agency. In terms of the second goal of this master thesis, we conduct a survey among 4100 individual investors in Norway and find that responsible investment behaviour is driven by moral objectives rather than financial considerations. This is evidenced with a statistically significant difference between moral and financial objectives being the main driver for responsible investors’ decisions to invest responsibly. We also find that responsible investors are committed to their responsible investments and keep them despite poor performance.