The stock market performance of ESG factor portfolios - A comparison between developed and emerging markets samples

Abstract

In this thesis, I study the stock market performance of ESG factor portfolios separately on developed and emerging markets during the period from January 2011 to December 2020. I use Refinitiv ESG data and construct portfolios separately based on the ESG Total, Environmental Pillar, Social Pillar and Governance Pillar Scores.

I find that none of the ESG factor portfolios have produced positive abnormal returns on either market but instead developed markets ESG factor portfolios formed based on the level of companies’ ESG performance have produced negative Carhart 4-factor and Fama and French 6-factor alphas for my sample period. Generally, the emerging markets ESG factor portfolios have earned slightly higher returns than the developed markets portfolios. On both markets, the ESG factor portfolios formed based on the Governance Pillar Scores have performed the weakest on average while the highest individual cumulative return during my sample period has been earned by an ESG factor portfolio formed based on the change in companies’ Environmental Pillar Score.

The performance of the developed markets ESG factor portfolios has generally been better during the first half of my sample period from January 2011 to December 2015 than during the second half from January 2016 to December 2020 while the performance of the emerging markets portfolios has been quite equal between the two halves. However, even when I study the first and second half of the sample period separately, I do not find any positive abnormal returns for any of the ESG factor portfolios on either market.

I suggest that when the ESG rating coverage expands, future research could study the relationship between ESG scores and stock returns on individual industries and on individual countries’ stock markets to find out if there are certain niches where ESG factor portfolios can be more profitable than what my tests with the large developed and emerging markets samples suggest.