Is there an ESG anomaly? Using textual analysis to detect market mispricing
Abstract
This thesis investigates the relationship between stock returns and ESG scores on primary listed
firms on the three major Scandinavian stock exchanges between 2017 and 2021. In conducting
the analysis, we have collected ESG scores from Refinitiv and designed two scores based on
textual analysis of the companies’ annual reports from 2015 to 2019. A two-year lag is applied
between the ESG scores and the financial data to ensure that ESG information is known before
the returns are produced, and the connection can be explained. We analyze the difference in
stock returns on firms with high and low ESG score by constructing long-short portfolios.
Then, we apply the Fama-French three-factor and five-factor models to control for different
risk exposures. The ESG-based portfolio shows no abnormal return using either ESG scores,
which suggests that the ESG risk is priced in the market.