The Impact of ESG Ratings on Risk & Return of Firms: An Empirical Analysis

Rafael Zincke & Niklas Ott

Student thesis: Master thesis


In order to examine the impact of ESG on risk & return, we investigate this relationship in the stock- and options market. Previous empirical research has presented inconclusive evidence regarding the positive or negative effects of ESG on these metrics. We contribute to this research with insulated pillar effects, an extensive sample, and an additional view from the option markets. We analyze returns,factor risk premiums, realized- & implied volatility, and perceived tail risk in an extensive panel of US firms based on Refinitiv’s ESG scores using the Fama-French and Fama-MacBeth procedure, as well as panel regressions. The results concerning returns suggest that (i) high ESG rated firms do not out- or underperform their lower-rated counterparts, and (ii) the governance factor exhibits a negative risk premium. In the context of risk, our findings imply that (i) on portfolio-level high ESG rated portfolios are exposed to significantly less realized volatility relative to low-rated ones. Including information from the option markets, (ii) the same effect holds for implied volatility, and (iii) the perceived tail risk is negatively affected by the governance rating. We conclude that ESG ratings can be useful in portfolio risk management and the governance ratings, in particular, even for firms. The risk-steering aspect is of greater importance for large firms and firms exposed to higher risk.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages127
SupervisorsPeter Feldhütter