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ESG Score Uncertainty and Excess Stock Returns: European Stock Market Case

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  • Michal Vyletelka

Abstract

The study explores a relationship between divergence in ESG scores (measurements of a company's performance in environmental, social and governance issues) and excess stock returns on the European equity market. The sample consists of 851 European stocks in the period from January 2015 to May 2022. It is concluded that, despite previous findings on the US stock market, a similar effect is not observed for equities in Europe. Even though the stock portfolios with the most and the least divergent ESG scores bear excess returns, the effect disappears when it is adjusted for Fama-French factors. The effect is not relevant for any specific industry, nor does it depend on the level of ESG awareness of the issuer's country. Deeper exploration of the nature of ESG score divergence, specifically by decomposition of the individual elements of ESG scores, could further contribute to the understanding of the relationship between the quality of non-financial disclosures and stock performance.

Suggested Citation

  • Michal Vyletelka, 2024. "ESG Score Uncertainty and Excess Stock Returns: European Stock Market Case," Prague Economic Papers, Prague University of Economics and Business, vol. 2024(2), pages 137-163.
    • Handle: RePEc:prg:jnlpep:v:2024:y:2024:i:2:id:854:p:137-163
    DOI: 10.18267/j.pep.854
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    References listed on IDEAS

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    1. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    2. Natalia Semenova & Lars Hassel, 2015. "On the Validity of Environmental Performance Metrics," Journal of Business Ethics, Springer, vol. 132(2), pages 249-258, December.
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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    More about this item

    Keywords

    ESG score divergence; excess returns; Fama-French analysis; sustainable finance; ESG investing;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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