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The Contributions of Betas versus Characteristics to the ESG Premium

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Firms that score low on environmental, social, and governance (ESG) indicators exhibit higher expected returns. This negative ESG premium might be driven by higher risk associated with low ESG scores, or it could signal investors’ preferences for firms with high ESG scores. The first driver implies an underlying, systematic ESG risk factor, such that ESG risk factor betas explain differences in expected returns. The second driver implies that firm-specific ESG characteristics explain the ESG premium. To identify the separate contributions of ESG betas and ESG characteristics for explaining variation in expected returns, this study uses two global data sets from 2004-2018 and reveals that ESG characteristics mainly explain variation in expected returns. A one standard deviation decrease in ESG scores is associated with an increase of 13 basis points in monthly expected returns. This study also sheds new light on how the term structure of the ESG premium has changed over time.

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  • Rocco Ciciretti & Ambrogio Dalò & Lammertjan Dam, 2017. "The Contributions of Betas versus Characteristics to the ESG Premium," CEIS Research Paper 413, Tor Vergata University, CEIS, revised 19 Dec 2019.
    • Handle: RePEc:rtv:ceisrp:413
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    Cited by:

    1. Ni, Yinan & Sun, Yanfei, 2023. "Environmental, social, and governance premium in Chinese stock markets," Global Finance Journal, Elsevier, vol. 55(C).
    2. Qian, Simeng, 2024. "The effect of ESG on enterprise value under the dual carbon goals: From the perspectives of financing constraints and green innovation," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 318-331.
    3. Cerqueti, Roy & Ciciretti, Rocco & Dalò, Ambrogio & Nicolosi, Marco, 2021. "ESG investing: A chance to reduce systemic risk," Journal of Financial Stability, Elsevier, vol. 54(C).
    4. Dahlström, Petter & Lööf, Hans & Sahamkhadam, Maziar & Stephan, Andreas & Lu, Emma Rui, 2023. "Science-based emission targets and risk-adjusted portfolio return: An analysis using global SBTi-validated stocks," Working Paper Series in Economics and Institutions of Innovation 492, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    5. Michele Azzone & Emilio Barucci & Davide Stocco, 2024. "Asset management with an ESG mandate," Papers 2403.11622, arXiv.org, revised Dec 2024.
    6. Bang, Jeongseok & Ryu, Doojin, 2024. "ESG factors and the cross-section of expected stock returns: A LASSO-based approach," Finance Research Letters, Elsevier, vol. 65(C).
    7. Becchetti, Leonardo & Ciciretti, Rocco & Dalò, Ambrogio, 2018. "Fishing the Corporate Social Responsibility risk factors," Journal of Financial Stability, Elsevier, vol. 37(C), pages 25-48.
    8. Roy Cerqueti & Rocco Ciciretti & Ambrogio Dalò & Marco Nicolosi, 2022. "Mitigating Contagion Risk by ESG Investing," Sustainability, MDPI, vol. 14(7), pages 1-13, March.
    9. Mario La Torre & Fabiomassimo Mango & Arturo Cafaro & Sabrina Leo, 2020. "Does the ESG Index Affect Stock Return? Evidence from the Eurostoxx50," Sustainability, MDPI, vol. 12(16), pages 1-12, August.
    10. Liu, Chenxi & Kang, Mengyao, 2024. "Is the cash-returns relationship risk induced?," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).
    11. Inova Fitri Siregar & Tubagus Ismail & Muhammad Taqi & Nurhayati Soleha, 2024. "Influence of ESG on Sustainability Reporting: Mediation Rule of Green Innovation and Investor Sentiment," International Journal of Energy Economics and Policy, Econjournals, vol. 14(1), pages 452-463, January.
    12. Fornari, Fabio & Pianeselli, Daniele & Zaghini, Andrea, 2024. "It better be good, it better be green," CFS Working Paper Series 723, Center for Financial Studies (CFS).
    13. Díaz, Antonio & Esparcia, Carlos & Alonso, Daniel & Alonso, Maria-Teresa, 2024. "Portfolio management of ESG-labeled energy companies based on PTV and ESG factors," Energy Economics, Elsevier, vol. 134(C).
    14. Maria Rodionova & Angi Skhvediani & Tatiana Kudryavtseva, 2022. "ESG as a Booster for Logistics Stock Returns—Evidence from the US Stock Market," Sustainability, MDPI, vol. 14(19), pages 1-26, September.

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    Keywords

    Socially Responsible Investment; ESG Premium; EIV correction;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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