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The Impact of ESG on Stocks’ Downside Risk and Risk Adjusted Return

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  • Lööf, Hans

    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Stephan, Andreas

    (Jönköping International Business School, Jönköping University & Centre of Excellence for Science and Innovation Studies (CESIS))

Abstract

Investments considering corporate social responsibility continue to expand. Are companies pursuing a CSR agenda benefiting shareholders by reducing their financial downside risk? This paper investigates the relationship between a firm’s environmental, social and corporate governance (ESG) scores and its downside risk on the stock market. We study this link using a panel of 887 stocks listed in five European countries over the period 2005-2017. Our empirical results show that higher ESG scores are associated with reduced downside risk of stock returns. Based on the Fama-French three factor model, we found no systematic relationship between ESG and the level of risk-adjusted return.

Suggested Citation

  • Lööf, Hans & Stephan, Andreas, 2019. "The Impact of ESG on Stocks’ Downside Risk and Risk Adjusted Return," Working Paper Series in Economics and Institutions of Innovation 477, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    • Handle: RePEc:hhs:cesisp:0477
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    References listed on IDEAS

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    More about this item

    Keywords

    ESG; Value at Risk; Risk-adjusted return; stock market; panel data;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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