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The expected returns of ESG excluded stocks. The case of exclusions from Norway's Oil Fund

Author

Listed:
  • Berle, Erika

    (University of Stavanger)

  • He, Wanwei

    (University of Stavanger)

  • Odegaard, Bernt Arne

    (University of Stavanger)

Abstract

What are the consequences of widespread ESG-based portfolio exclusions on the expected returns of firms subject to exclusion? We consider two possible theoretical explanations. 1) Short-term price pressure around the exclusions leading to correction of mispricing going forward. 2) Long term changes in required returns. We use the exclusions of Norwegian Government Pension Fund Global (GPFG -`The Oil Fund') to investigate. GPFG is the world's largest SWF, and its ESG decisions are used as a model for many institutional investors. We construct various portfolios representing the GPFG exclusions. We find that these portfolios have significant superior performance (alpha) relative to a Fama-French five factor model. The sheer magnitude of these excess returns (5% in annual terms) leads us to conclude that short-term price pressure can not be the only explanation for our results, the excluded firms expected returns must be higher in the longer term.

Suggested Citation

  • Berle, Erika & He, Wanwei & Odegaard, Bernt Arne, 2022. "The expected returns of ESG excluded stocks. The case of exclusions from Norway's Oil Fund," UiS Working Papers in Economics and Finance 2022/3, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2022_003
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    References listed on IDEAS

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    More about this item

    Keywords

    ESG investing; Exclusion; Oil Fund;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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