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ESG Investing and Stock Return Comovements

Author

Listed:
  • Marcin Kacperczyk

    (Imperial College London Business School)

  • Lin Peng

    (Zicklin School of Business, Baruch College, City University of New York)

  • Jing Xie

    (Department of Finance and Business Economics, Faculty of Business Administration, University of Macau)

Abstract

ESG has become a crucial consideration for asset managers in recent years. Consistent with the style investing model of Barberis and Shleifer (2003), we find that the stock returns of firms with improved ESG scores (Improvers) tend to comove significantly more with the returns of other high-ESG stocks and less with those of low-ESG stocks. The new phenomenon only emerged recently, is stronger for Improvers with more salient score changes, and cannot be explained by shared risk factors or similarities in firm fundamentals. Furthermore, flow-induced net purchases by high-ESG mutual funds increase the returns of high-ESG stocks, which reverses in the following month. The evidence suggests that investors’ increased focus on ESG has generated a new style factor that causes excess comovement of within-style asset returns.

Suggested Citation

  • Marcin Kacperczyk & Lin Peng & Jing Xie, 2024. "ESG Investing and Stock Return Comovements," Working Papers 202403, University of Macau, Faculty of Business Administration.
    • Handle: RePEc:boa:wpaper:202403
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    References listed on IDEAS

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    Keywords

    ESG investing; clientele effect; return comovement; style investing; demand system asset pricing;
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