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Is Sustainability Profitable?

Betsholtz, Nils LU ; Lindström, Anton LU and Wennerberg, Edvard LU (2020) FEKH69 20201
Department of Business Administration
Abstract
This paper examines the relationship between the ESG-score, including its pillars Environment,
Social and Governance and market return from July 2002 through June 2018 by using the Stoxx
Europe 600 index. The comparison is done by applying a portfolio approach and panel data fixed
effect approach. By comparing some of the most used multifactor models, the CAPM and Fama-
French three-factor model were found more suitable to price the sustainability sorted portfolios
than the Carhart’s four-factor model and Fama-French five-factor model. No significant difference
in return between leading- and lagging sustainability corporations were found in the portfolio
approach. However, some portfolios generated a positive abnormal return which... (More)
This paper examines the relationship between the ESG-score, including its pillars Environment,
Social and Governance and market return from July 2002 through June 2018 by using the Stoxx
Europe 600 index. The comparison is done by applying a portfolio approach and panel data fixed
effect approach. By comparing some of the most used multifactor models, the CAPM and Fama-
French three-factor model were found more suitable to price the sustainability sorted portfolios
than the Carhart’s four-factor model and Fama-French five-factor model. No significant difference
in return between leading- and lagging sustainability corporations were found in the portfolio
approach. However, some portfolios generated a positive abnormal return which may indicate a
violation of the (semi-) efficient market hypothesis. The market is more (semi-) efficient after the
financial crisis than before the financial crisis. In the panel data fixed effect approach, there was a
negative relationship between ESG-score and market return. The negative relationship was higher
after the financial crisis than before. Overall, the results were robust across the sustainability pillars
in both the portfolio approach and panel data fixed effect approach. The findings suggest that
corporations would not necessarily generate higher shareholder returns by undertaking ESG
initiatives which may be suggested by legitimacy theory, although one can’t exclude other nonfinancial
gains. A negative relationship between shareholder returns and ESG would imply that
the management has to balance the interests of the different stakeholders in their decision making. (Less)
Please use this url to cite or link to this publication:
author
Betsholtz, Nils LU ; Lindström, Anton LU and Wennerberg, Edvard LU
supervisor
organization
course
FEKH69 20201
year
type
M2 - Bachelor Degree
subject
keywords
ESG, STOXX 600, Fama-French multifactor factor model, CAPM, Carhart four-factor model, Panel data fixed effect
language
English
id
9023929
date added to LUP
2020-08-05 12:46:09
date last changed
2020-08-05 12:46:09
@misc{9023929,
  abstract     = {{This paper examines the relationship between the ESG-score, including its pillars Environment,
Social and Governance and market return from July 2002 through June 2018 by using the Stoxx
Europe 600 index. The comparison is done by applying a portfolio approach and panel data fixed
effect approach. By comparing some of the most used multifactor models, the CAPM and Fama-
French three-factor model were found more suitable to price the sustainability sorted portfolios
than the Carhart’s four-factor model and Fama-French five-factor model. No significant difference
in return between leading- and lagging sustainability corporations were found in the portfolio
approach. However, some portfolios generated a positive abnormal return which may indicate a
violation of the (semi-) efficient market hypothesis. The market is more (semi-) efficient after the
financial crisis than before the financial crisis. In the panel data fixed effect approach, there was a
negative relationship between ESG-score and market return. The negative relationship was higher
after the financial crisis than before. Overall, the results were robust across the sustainability pillars
in both the portfolio approach and panel data fixed effect approach. The findings suggest that
corporations would not necessarily generate higher shareholder returns by undertaking ESG
initiatives which may be suggested by legitimacy theory, although one can’t exclude other nonfinancial
gains. A negative relationship between shareholder returns and ESG would imply that
the management has to balance the interests of the different stakeholders in their decision making.}},
  author       = {{Betsholtz, Nils and Lindström, Anton and Wennerberg, Edvard}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Is Sustainability Profitable?}},
  year         = {{2020}},
}