Impact of ESG Ratings on Stock Performance & Resiliency: A Comparative Study of European, Asian and Oceanian Stocks

Frederik Dyngbo & Christian Bjørnholt Østrup-Møller

Student thesis: Master thesis


This thesis sat out to measure the long-term returns and short-term resiliency of socially responsible stocks in Europe, Asia and Oceania. To test the long-term returns, we used ten valueweighted decile portfolios and a long-short portfolio sorted on an overall- and “pillar specific” Environmental-, Social-, and Governance score. We primarily focused on Jensen’s alpha measure in our adaption of the Fama and French three-and-five factor model and Carhart’s four factor model. For the European and Oceanian region, our Jensen’s alpha coefficients did not differ significantly from zero. With this, we conclude that both the overall- and the pillar-specific ESG portfolios showed neither sign of outperformance nor underperformance. For the Asian region, our Jensen’s alpha coefficient for the long-short portfolio showed negative and significant results at the 5% level. With this, we conclude that an investment strategy that shorts “brown”-tilted portfolios to fund an investment in “green”-tilted portfolios would produce a negative alpha. We analyzed the long-term returns from January 2007 through 2020. To test the resiliency of stocks, we undertook a multiple regression analysis of the buy-and-hold abnormal returns on the company’s overall – and “pillar specific” scores, after controlling for multiple other factors such as sector affiliation, market-based measures of risk and accountingbased measures of financial performance. To further substantiate our findings, we undertook an Owen-Shapley decomposition of R2 . We analyzed the resiliency of socially responsible stocks in a COVID crisis period from January through March 2020. For the European and Oceanian region, we presented robust evidence that neither the overall- nor the pillar-specific scores offered significant resiliency or strong explanatory power for returns. For the Asian region, we showed that the overall ESG score and the Environmental- and Social-pillar offered negative explanatory power for returns and did not provide investors with short-term resiliency. To the best of our knowledge, this thesis represents the first tri-regional, ESG-pillar-specific performance and resilience study, using an identical methodological approach across regions. Our findings from Europe and Oceania support the group of previous studies finding non-negative links between ESG and financial performance and resiliency. Oppositely, our findings from Asia indicates that there exist inter-regional differences and that socially responsible performance is negatively associated with long-term returns and short-term resiliency in Asia.

Educations, (Graduate Programme) Final Thesis
Publication date2021
Number of pages146
SupervisorsAndreas Brøgger