Is It Time for Investors to Wake Up? A Study on the Relationship between Social and Financial Performance

Erika Maria Degerman & Julie Klit Munksgaard Johansen

Student thesis: Master thesis


This thesis contributes to both investigating the link between social performance and financial performance and to how corporations’ political views affect this relationship. Inspired by the article “Money where their mouths are” (The Economist, 2019), we construct a wokeness index based on companies’ Environmental Social and Governance (ESG) ratings, ESG Controversies score, and corporate political donations. The ESG and ESG Controversies data is from Refinitiv and the data for political donations is provided by the Center of Responsive Politics. We focus our analysis on the U.S. market, specifically the S&P 500. We collect the data for our wokeness index from 2005-2018. We use stock returns as a proxy for financial performance and collect the stock returns for the period 2006-2019 from Datastream. Previous literature suggests that ESG ratings have a positive influence on financial performance. However, less evidence exists on how the ESG Controversies score and the corporate political donations influence the financial performance of firms. The econometrical framework applies a high and low portfolio approach using the Fama and French (1992) 3-factor, the Carhart (1997) 4-factor, and the Fama and French (2015) 5-factor model. Our results suggest that the relationship between our wokeness index and financial performance is U-shaped, indicating that investors benefit most from investing in both the wokest and the least woke companies. Hwever, the results lack statistical significance.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2020
Number of pages109
SupervisorsLena Jaroszek