Does Corporate Social Responsibility Still Pay Off? Positive and Best-in-Class Screening Portfolios by Using MSCI ESG Ratings in 1992-2017

No Thumbnail Available
Journal Title
Journal ISSN
Volume Title
School of Business | Master's thesis
Degree programme
48 + 24
ESG Investing, i.e. investing based on Environmental, Social, and Governance considerations, is an increasingly more important topic amid investors. Previous research has found positive and statistically significant excess return in positive and best-in-class screening methods especially when applying the Community and Employee Relations category portfolios. In the late 2010s, controversial results have appeared in ESG literature. However, risk-adjusted research on ESG ratings and future returns has not been conducted after 2012. This thesis examines the fundamental question of ESG investing: whether stocks with high MSCI ESG ratings exhibit excess return. The thesis studies whether ESG ratings exhibit the excess return when using the positive screening method in the previously examined period of 1992–2004 and the best-in- class screening method in the time period of 1992– 2007. More interestingly, the thesis examines the periods after the initial studies: 2005–2017 for the positive screens and 2008–2017 for the best-in-class screens. Furthermore, the whole sample of 1992–2017 is examined for both screening methods. The thesis contributes to the existing literature in the following three different ways. First, the thesis mostly confirms the results of previous research by Kempf and Osthoff (2007), and Statman and Glushkov (2009) about the statistically significant relation between the financial performance and MSCI ESG rating of companies. The Community screen portfolio resulted in positive and statistically significant returns when employing the best-in-class screen. Further, Employee Relations yields statistically significant results when positive screening is used. Furthermore, this thesis finds that the Diversity category exhibited positive and statistically significant 3.97% annualized excess return while in the previous studies the result remained barely statistically insignificant. Second, the thesis finds that the positive and statistically significant results disappear after initial time period in 2005–2017 and 2008–2017. The Community and Employee Relations screen portfolios turn mostly negative yet statistically insignificant. More interestingly, the Diversity category exhibits statistically significant annualized excess return of -4.72%. Furthermore, the Environmental screen portfolio yields statistically significant 3.40% annualized excess return. Third, the thesis measures the whole sample time period of 1992–2017. Nearly all the results from the prior time periods disappear when using the entire time period. Only when using positive screening, the Products category results in a negative and statistically significant return of -2.51%.
Thesis advisor
Suominen, Matti
ESG, CSR, SRI, positive screen, best-in-class screen, MSCI ESG ratings
Other note