The Effect of Socially Responsible Investing on Risk-adjusted Returns: An Empirical Study on Stock Performance in the United States and Scandinavia

Simen Parnas Gulnes

Student thesis: Master thesis


Socially responsible investing is a fast-growing investment practice that has increased in popularity over the last few years. For investors, the expected return on investment is essential when considering an investment opportunity, and previous research on risk-adjusted return from socially responsible investing yields ambiguous results. This thesis, therefore, aimed to answer how following such a strategy affects the risk-adjusted returns achieved, with the empirical case being the United States and Scandinavia. Hundreds of stocks were reviewed and put into portfolios based on their ESG score from two different ESG score providers – Asset4 and Sustainalytics, over two time periods – from 2007 to 2019, and from 2014 to 2019, to help answer this question. In the context of this thesis, the definition of socially responsible investing is that it considers the ESG factors.
Based on a review of the literature and financial theory, the thesis used the CAPM, the Fama-French three-factor model, and the Carhart four-factor model, with both domestic and international factors to calculate the risk-adjusted returns of the portfolios created. Analysis of the resulting alphas achieved by the portfolios indicates that high-scoring ESG portfolios outperform conventional investing in most cases, with the results being more significant in the US than for Scandinavia. On this basis, it is suggested that investors should invest in high-scoring ESG stocks to attain positive alphas and thus better risk-adjusted return compared to conventional investing. The results further imply that the market does not seem to value ESG scores adequately.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages96