Empirical Analysis of ESG Score Momentum on Stock Performance

Andreas Kjærnet Carlsen & Kristoffer Andreas Aamodt

Student thesis: Master thesis


Institutional investors are increasingly implementing non-financial performance into their investment decisions, often referred to as socially responsible investing. This thesis will therefore investigate whether institutional investors can yield a positive alpha by applying an ESG score momentum-based strategy, as such contributing with empirical findings to the inconsistent literature regarding the correlation between ESG score momentum and stock performance. The authors investigates this relationship by testing two ESG- and pillar-specific score momentumbased strategies, for both the US- and European markets. As such, two portfolios are constructed: a High portfolio for companies with the strongest score momentum, and a Low portfolio for the companies with the poorest score momentum. OLS regressions are applied on the CAPM-, Fama & French three-factor- and Carhart four-factor models, in order to evaluate if parts of the excess return could be assigned to other factors. The findings provide evidence of positive and negative correlation for both a strong and a poor score momentum, respectively, as the strategies yield a significant positive alpha at the 1% statistical level for both the CAPM single-index and the Fama & French multifactor models. A too high degree of uncertainty was associated with the results of the Carhart model regression, which ultimately led the authors to exclude the model from the analysis. Further, the alpha is not particularly contingent to geography, although the magnitude of alpha is greater in Europe compared to that of the US market. Consequently, the findings both support and contradicts present literature. As such, this thesis contributes to the field of investigation with an additional tool to implement in an institutional investor’s investment decision. Furthermore, the empirical findings facilitate a discussion regarding ESG implementation which ultimately might enhance the market efficiency

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final ThesisMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2021
Number of pages165