What Matters in ESG Investing? Exploring the Underlying Drivers of ESG and Their Impact on Abnormal Returns

Jakob Ravn Hansen & Tobias Qwist Fenger

Student thesis: Master thesis


This thesis examines the relationship between environmental, social and governance (ESG) factors and abnormal returns and, specifically, which underlying drivers of ESG that are most important. Regression analyses are conducted with ESG data from Thomson Reuter’s Asset4 database, using a sample of US and European firms in three time periods within 2003-2017. We find that 11 ESG variables are significantly associated with abnormal returns, of which eight ESG variables are positively associated. There is a regional divergence in the significance of ESG variables, as no variables are significant both in the US and Europe in the same time period. Additionally, there is no temporal persistence in ESG variables, as no variables are significant in consecutive time periods. It is also tested whether investors could have utilized ESG information to form portfolios with abnormal returns. Two of the 22 tested portfolios obtained significant abnormal returns, which calls for more sophisticated methods in leveraging ESG data to construct portfolios. The findings of this thesis underscore that both academic researchers and investors can benefit from decomposing ESG scores in examining the association with abnormal returns. The decomposition of ESG scores is useful in understanding the underlying drivers in the relationship between ESG and abnormal returns

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2019
Number of pages131