The Impact of ESG Factors on Asset Returns: Empirical Research

The subject of the research is the assessment of Investment decision-making efficiency considering the sustainable development requirements. The article aims to identify the relationship between environmental, social and governance (ESG) performance and market returns for investors and the reasons for it. The relevance of the paper is determined by the need to develop research in the field of ESG integration and evaluation of the portfolio investment effectiveness in the context of responsible investment practices popularity. Scientific novelty: the study develops the theory of ESG integration and allows the authors to conclude that ESG commitment is a driver of market profitability for investors. The authors apply methods such as theoretical analysis of scientific publications (analysis, synthesis, generalisation) and quantitative methods, including statistical data analysis, regression analysis, financial modelling. The research base is scientific works of domestic and foreign authors, analytical reports of rating agencies, ESG funds, historical stock market data on companies analysed in the course of this study. All the information used in this study is publicly available or provided by the Bloomberg database. In the course of the study, authors form model portfolios of ESG-oriented and ESG-neutral companies shares and perform a comparative analysis of their fundamental indicators and financial returns. The authors conclude that the portfolio of ESG-oriented companies demonstrates profitability no lower than the portfolio of ESG-neutral companies, considering the risks. At the same time, the values of the fundamental indicators of ESG-oriented companies are inferior to the values of ESG-neutral companies. The relationship between the degree of a company’s ESG compliance and its investment attractiveness is due, among other things, to non-financial value drivers. The authors recommend integrating ESG into the analysis of investment portfolios, significant for the development of investment strategies.

1. Amel-Zadeh A., Serafeim G. Why and how investors use ESG information: Evidence from a global survey. Harvard Business School Working Paper. 2017;(79). URL: https://dash.harvard.edu/bitstream/handle/1/30838135/17-079.pdf?sequence=1&isAllowed=y

2. Loseva O. V., Fedotova M. A. Assessment of investment attractiveness of socio-economic entities. Imushchestvennye otnosheniya v Rossiiskoi Federatsii = Property Relations in the Russian Federation. 2021;(3):58-67. (In Russ.). DOI: 10.24411/2072-4098-2021-10304

3. Dhaliwal D. S. et al. Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review. 2011;86(1):59-100. DOI: 10.2308/accr.00000005

4. Efimova O., Rozhnova O. Covid-19: Financial impact and disclosure. Comprehensible Science. 2021;186:205-213. DOI: 10.1007/978-3-030-66093-2_20

5. Khan M., Serafeim G., Yoon A. Corporate sustainability: First evidence on materiality. The Accounting Review. 2015;91(6):1697-1724. DOI: 10.2308/accr-51383

6. Efimova O. Integrating sustainability issues into investment decision. Journal of Reviews on Global Economics. 2018;7:668-681. DOI: 10.6000/1929-7092.2018.07.61

7. Berg F., Kölbel J., Rigobon R. Aggregate confusion: The divergence of ESG ratings. SSRN Electronic Journal. 2019. DOI: 10.2139/ssrn.3438533

8. Brundtland G. H. Our common future. Report of the International Commission on Environment and Development. 1989. URL: https://sustainabledevelopment.un.org/content/documents/5987our-commonfuture.pdf

9. Van Holt T., Whelan T. Research frontiers in the era of embedding sustainability: Bringing social and environmental systems to the forefront. Journal of Sustainability Research. 2021;3(2): e210010. DOI: 10.20900/jsr20210010

10. Freemen R. E. Strategic management: A stakeholder approach. Cambridge: Cambridge University Press; 2010. 292 p.

11. Elkington J. Enter the triple bottom line. In: Henriques A., Richardson J., eds. The triple bottom line: Does it all add up? London, New York: Routledge; 2013:23-38.

12. Schoenmaker D., Schramade W. Principles of sustainable fi e. Oxford, New York: Oxford University Press; 2018. 432 p.

13. Cheng B., Ioannou I., Serafeim G. Corporate social responsibility and access to finance. Strategic Management Journal. 2014;35(1)1-23. DOI: 10.1002/smj.2131

14. Clark G. L., Feiner A., Viehs M. From the stockholder to the stakeholder: How sustainability can drive financial outperformance. SSRN Electronic Journal. 2015. DOI: 10.2139/ssrn.2508281

15. Busch T., Bauer R., Orlitzky M. Sustainable development and financial markets: Old paths and new avenues. Business and Society. 2016;55(3):303-329. DOI: 10.1177/0007650315570701

16. Renshaw A.A. ESG’s evolving performance: First, do no harm. Frankfurt: Axioma, Inc.; 2018. 17 p.

17. Goss A., Roberts G. S. The impact of corporate social responsibility on the cost of bank loans. Journal of Banking & Finance. 2011;35(7):1794-1810. DOI: 10.1016/j.jbankfin.2010.12.002

18. Gregory A., Tharyan R., Whittaker J. Corporate social responsibility and fi value: Disaggregating the effects on cash flow, risk and growth. Journal of Business Ethics. 2014;124(4):633-657. DOI: 10.1007/s10551013-1898-5

19. Friede G., Busch T., Bassen A. ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance and Investment, 2015;5(4):210-233. DOI: 10.1080/20430795.2015.1118917

20. Cappucci M. The ESG integration paradox. Journal of Applied Corporate Finance. 2018;30(2):22-28. DOI: 10.1111/jacf.12296

21. Eccles R. G., Kastrapeli M. D. The investing enlightenment. Boston, MA: State Street Corp.; 2017. 40 p. URL: https://arabesque.com/research/Final_The_Investing_Enlightenment.pdf

22. Van Burren E., Plantinga A., Scholtens B. ESG integration and the investment management process: Fundamental investing reinvented. Journal of Business Ethics. 2016;138(3):525-533. DOI: 10.1007/s10551-015-2610-8

23. Melas D., Nagy Z., Kulkarni P. Factor investing and ESG integration. In: Jurczenko E., ed. Factor investing: From traditional to alternative risk premia. Amsterdam: Elsevier; 2017:389-413.

24. Visconti R. M. DCF metrics and the cost of capital: ESG drivers and sustainability patterns. 2021. URL: https://www.researchgate.net/publication/344953641

25. Ferrarese C., Hanmer J. The impact of ESG investing in corporate bonds. London: Fidelity International; 2018. 14 p. URL: https://page.ws.fidelityinternational.com/rs/829-LMV‑001/images/ESG%20White%20Paper%20FINAL.pdf

26. Whelan T., Atz U., Clark C. ESG and financial performance: Uncovering the relationship by aggregating evidence from 1,000 plus studies published between 2015-2020. New York: NYU STERN Center for sustainable business; 2021. 19 p. URL: URL: https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021.pdf

27. Sinha R., Datta M., Ziolo M. Inclusion of ESG factors in investments and value addition: A meta-analysis of the relationship. In: Tarczyński W., Nermend K., eds. Effective investments on capital markets. Cham: Springer International Publishing; 2019:93-109. DOI: 10.1007/978-3-030-21274-2_7

28. Vishwanathan P. et al. Strategic CSR: A concept building meta-analysis. Journal of Management Studies. 2020;57(2):314-350. DOI: 10.1111/joms.12514

29. Nagy Z., Kassam A., Lee L.-E. Can ESG add alpha? An analysis of ESG tilt and momentum strategies. The Journal of Investing. 2016;25(2):113-124. DOI: 10.3905/joi.2016.25.2.113

30. Jo H., Na H. Does CSR reduce firm risk? Evidence from controversial industry sectors. Journal of Business Ethics. 2012;110(4):441-456. DOI: 10.1007/s10551-012-1492-2

31. Krüger P. Corporate goodness and shareholder wealth. Journal of Financial Economics. 2015;115(2):304-329. DOI: 10.1016/j.jfineco.2014.09.008

32. Hawken P. Socially responsible investing. How the SRI industry has failed to respond to people who want to invest with conscience and what can be done to change it. Sausalito, CA: Natural Capital Institute; 2004. 40 p. URL: https://community-wealth.org/sites/clone.community-wealth.org/files/downloads/report-harkin.pdf

33. Chatterji A., Durand R., Levine D. I., Touboul S. Do ratings of fi converge? Implications for managers, investors and strategy researchers. Strategic Management Journal. 2016;37(8):1597-1614. DOI: 10.1002/smj.2407

34. Fernández M. S., Abu-Alkheil A., Khartabiel G. M. Do German green mutual funds perform better than their peers? Business and Economics Research Journal. 2019;10(2):297-312. DOI: 10.20409/berj.2019.169