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Expected and realized returns on stocks with high- and low-ESG exposure

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  • Olaf Stotz

    (Frankfurt School of Finance and Management)

Abstract

Empirically, stocks with a good environmental, social, or governance (ESG) rating tend to earn higher returns than stocks with a low rating. In contrast, the expected returns of high-ESG stocks are primarily lower than those of low-ESG stocks. The difference between realized and expected returns in the ESG domain constitutes a puzzle which we will address in this paper. Applying a return decomposition, we find that the puzzle can be explained by discount rate news. We find that discount rates of high-ESG stocks have fallen relative to low-ESG stocks. However, discount rate news does not reflect changes in risk; rather, discount rate news is systematically related to the demand of investors who have ESG preferences.

Suggested Citation

  • Olaf Stotz, 2021. "Expected and realized returns on stocks with high- and low-ESG exposure," Journal of Asset Management, Palgrave Macmillan, vol. 22(2), pages 133-150, March.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:2:d:10.1057_s41260-020-00203-z
    DOI: 10.1057/s41260-020-00203-z
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    More about this item

    Keywords

    Expected returns; Realized returns; Cash-flow news; Discount rate news; ESG; Sustainable investing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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