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Doing safe by doing good : ESG investing and corporate social responsibility in the U.S. and Europe
(2019)
This paper examines the profitability of investing according to environmental, social and governance (ESG) criteria in the U.S. and Europe. Based on data from 2003 to 2017, we show that a portfolio long in stocks with the highest ESG scores and short in those with the lowest scores yields a significantly negative abnormal return. Interestingly, this is caused by the strong positive return of firms with the lowest ESG activity. As we find that increasing ESG scores reduce firm risk (particularly downside risk), this hints at an insurance-like character of corporate social responsibility: Firms with low ESG activity need to offer a corresponding risk premium. The perception of ESG as an insurance can be shown to be stronger in more volatile capital markets for U.S. firms, but not for European firms. Socially responsible investment may therefore be of varying attractiveness in different market phases.
This study develops a novel 2-step hedonic approach, which is used to construct a price index for German paintings. This approach enables the researcher to use every single auction record, instead of only those auction records that belong to a sub-sample of selected artists. This results in a substantially larger sample available for research and it lowers the selection bias that is inherent in the traditional hedonic and repeat sales methodologies. Using a unique sample of 61,135 auction records for German artworks created by 5,115 different artists over the period 1985 to 2007, we find that the geometric annual return on German art is just 3.8 percent, with a standard deviation of 17.87 percent. Although our results indicate that art underperforms the market portfolio and is not proportionally rewarded for downside risk, under some circumstances art should be included in an optimal portfolio for diversification purposes.
We examine whether the uncertainty related to environmental, social, and governance (ESG) regulation developments is reflected in asset prices. We proxy the sensitivity of firms to ESG regulation uncertainty by the disparity across the components of their ESG ratings. Firms with high ESG disparity have a higher option-implied cost of protection against downside tail risk. The impact of the misalignment across the different dimensions of the ESG score is distinct from that of ESG score level itself. Aggregate downside risk bears a negative price for firms with low ESG disparity.