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Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020

Johannes Kabderian Dreyer (Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark)
Mateus Moreira (Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark)
William T. Smith (Deparment of Economics, Memphis State University, Memphis, Tennessee, USA)
Vivek Sharma (Department of Finance, Analytics, Risk Management, and Economics, University of Hartford, West Hartford, Connecticut, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 2 January 2023

Issue publication date: 25 January 2023

865

Abstract

Purpose

This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020.

Design/methodology/approach

The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods.

Findings

Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance.

Research limitations/implications

If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers.

Originality/value

Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.

Keywords

Citation

Kabderian Dreyer, J., Moreira, M., Smith, W.T. and Sharma, V. (2023), "Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020", Review of Accounting and Finance, Vol. 22 No. 1, pp. 37-61. https://doi.org/10.1108/RAF-02-2022-0046

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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