The Contributions of Betas versus Characteristics to the ESG Premium

Rocco Ciciretti, Ambrogio Dalò () and Lammertjan Dam
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Ambrogio Dalò: University of Rome "Tor Vergata", http://www.ceistorvergata.it

No 413, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: Firms that score low on environmental, social, and governance (ESG) indicators exhibit higher expected returns. This negative ESG premium might be driven by higher risk associated with low ESG scores, or it could signal investors’ preferences for firms with high ESG scores. The first driver implies an underlying, systematic ESG risk factor, such that ESG risk factor betas explain differences in expected returns. The second driver implies that firm-specific ESG characteristics explain the ESG premium. To identify the separate contributions of ESG betas and ESG characteristics for explaining variation in expected returns, this study uses two global data sets from 2004-2018 and reveals that ESG characteristics mainly explain variation in expected returns. A one standard deviation decrease in ESG scores is associated with an increase of 13 basis points in monthly expected returns. This study also sheds new light on how the term structure of the ESG premium has changed over time.

Keywords: Socially Responsible Investment; ESG Premium; EIV correction (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-07-28, Revised 2019-12-19
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: The contributions of betas versus characteristics to the ESG premium (2023)
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