Expected and realized returns on stocks with high- and low-ESG exposure

Olaf Stotz ()
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Olaf Stotz: Frankfurt School of Finance and Management

Journal of Asset Management, 2021, vol. 22, issue 2, No 6, 133-150

Abstract: Abstract Empirically, stocks with a good environmental, social, or governance (ESG) rating tend to earn higher returns than stocks with a low rating. In contrast, the expected returns of high-ESG stocks are primarily lower than those of low-ESG stocks. The difference between realized and expected returns in the ESG domain constitutes a puzzle which we will address in this paper. Applying a return decomposition, we find that the puzzle can be explained by discount rate news. We find that discount rates of high-ESG stocks have fallen relative to low-ESG stocks. However, discount rate news does not reflect changes in risk; rather, discount rate news is systematically related to the demand of investors who have ESG preferences.

Keywords: Expected returns; Realized returns; Cash-flow news; Discount rate news; ESG; Sustainable investing (search for similar items in EconPapers)
JEL-codes: G12 G30 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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DOI: 10.1057/s41260-020-00203-z

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