ESG ratings and stock performance : an empirical investigation of the link between ESG ratings and stock performance of European large cap firms

Abstract

This thesis investigates the link between ESG ratings and stock performance of European large capitalization firms. Using ESG ratings from three independent providers – Thomson Reuters, Bloomberg and Sustainalytics – we examine differences in returns of zero-investment portfolios with a long position in the quartile consisting of top ESG-rated firms and a short position the quartile consisting of low ESG-rated firms. We find differences in return based on the choice of rating provider. Only Thomson Reuters portfolios earn negative annual abnormal returns of 6.0%-8.4%, suggesting that investors pay a premium for better ESG-rated firms. Given the observed differences in return and composition of the constructed providers’ portfolios, our findings suggest ESG ratings are subjective and may cause confusion when implementing ESG features in a portfolio.