On the relationship between sustainability and financial return in the U.S. stock market

Abstract

This thesis studies the relationship between environmental, social and corporate governance (ESG) indicators and return for American stocks in the period 1995-2013. The study is carried out through three empirical analyses: the portfolio formation method of Fama and French, the two-stage regression method of Fama and MacBeth and an altered version of the Fama-MacBeth regression analysis. The results of the analyses are ambiguous and lack statistical significance. Thus, the study gives no indication that a focus on ESG factors create abnormal returns in the studied sample. In the existing literature there has not yet been established consensus about the effect of sustainability factors on stock return: Some studies find evidence of a curvilinear connection between responsibility factors and financial return. Other studies identify a negative relationship. However, most studies have ambiguous results or lack statistical power. Therefore, there are still opportunities for further research on the subject. The author raises some critical points when including sustainability factors in an econometric analysis concerning the identification of sustainability indicators, the quantifi- cation of these factors and how they are included in the analysis. It is recommended that these challenges are considered in future research.