Socially Responsible Investing: In Search of Abnormal Returns: An Empirical Analysis of the Relationship between Ethical Performance and Stock Returns in Europe and the US

Jasper Hofmann & Sherwin Shayesteh

Student thesis: Master thesis


This thesis contributes to the emerging body of literature on socially responsible investing (SRI) that investigates the relation between ethical performance and stock performance. It is the purpose of this thesis to propose whether the inclusion of ethical criteria into the investment process improves or deteriorates, if anything, the risk-return quality of an investment. We extract yearly data on environmental, social, corporate governance and aggregate ESG performance from Thomson Reuters for European and US companies and self-compose ethical as well as control portfolios. Performance differences are then examined using the Carhart four-factor and Fama-French five-factor model as well as the Sharpe Ratio. As former studies are argued to yield results specific to geographies, observation periods, industries or ESG indicators, this thesis examines a variety of settings to increase overall comparability. It is tested whether ethical performance or notable changes in ethical performance generate significant stock outperformance in Europe, the US, and in environmentally and socially sensitive sectors from 2006 to 2015. We discover no general relationship between ethicality and stock performance but rather that it differs across settings. The most striking finding of this thesis is the significant outperformance by 8% to 10% annually of portfolios with notable environmental, social and aggregate ESG improvements. Upon looking further into operational measures, i.e. ROA and ROE, we suggest that investors pay a short-term premium on ethical companies, which however seems to diminish over time. The thesis concludes with the proposition that the inclusion of ethical criteria into the investment process is favorable depending on the geographic and industry focus as well as the holding period preference of the investor

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final ThesisMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2018
Number of pages141