The Incentives and Financial Performance of ESG Portfolios in Eastern Europe

Abstract

This study aims to create additional value by examining the incentives and financial performance of Environmental, Social, and Governance (ESG) scored portfolios in the Eastern European region. Using a sample of publicly traded firms from January 2010 to December 2021, value-weighted Top, Bottom, and Long-Short portfolios were constructed based on their respective ESG ratings. In line with theory, it is found that different ESG scores influence financial performance; thus, results vary between portfolios and given scores. This is underpinned by the fact that no significant alphas were found for the entire horizon, and the positive or negative nature of the alpha varied between different scores and portfolios. Building on this knowledge, sub-samples were created for 2010-2015 and 2016-2021 to observe any difference in the outcome. As discovered, excess returns show an increase for all portfolios in the later sample, indicating better risk-adjusted performance. However, it is observed that Bottom portfolios generally perform better in the earlier sample, while Top portfolios perform better in the later sub-sample. Despite this observation, positively significant alphas were only found for the Top and Long-Short portfolios for ESGC and E-scored portfolios in the earlier sample. Given the inconsistency in results, Hypotheses for the Top, Bottom, and Long-Short portfolios were rejected. Looking at the empirical research conducted further indicates that investors should not necessarily await abnormal returns when investing in and trading ESG portfolios, given that results vary with different analyzed periods. In conclusion, this paper can serve as an indication for investors about the status and readiness of the Eastern European SRI market; however, other economic considerations and limitations of the paper should be reflected and contemplated when relying on the results obtained.