Understanding the effect of ESG scores on stock returns using mediation theory

Serge Darolles, Yuyi He and Gaelle Le Fol
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Serge Darolles: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this paper, we investigate the impact of ESG scores on stock returns and examinethe channels, if any, through which ESG information is transmitted. The literature onthe ESG transmission mechanism has essentially identified two channels (the "investordemand channel" and the "fundamentals or profitability channel"), but these channelsare empirically difficult to identify and quantify. We then use a causal mediationmodel to address this issue, analysing whether ESG scores can predict future returnsand identifying which channels are at play. Our results show that current ESG scoreshave a negative real effect on future stock returns and that the transmission channelsare not the same depending on the pillar - either E, S, G, we focus on. The "investordemand channel" explains a significant part of the effect we observe empirically. Thedirect -or fundamental- channel, which we would expect to be positive, is negative,except for G, leading in general to a negative impact of ESG scores on future stockreturns. Such results prove that ESG scores do indeed contain information that canbe exploited by asset managers in their portfolio choices.

Keywords: ESG performance; Investment decisions; Sustainable investing; Mediationanalysis; Transmission channels; Institutional investors (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-env and nep-fmk
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Published in 17th Financial Risks International Forum (Risks Forum), Mar 2024, Paris, France

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Working Paper: Understanding the effect of ESG scores on stock returns using mediation theory (2024)
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