Do SRI investors consider the ESG effects in their investments?
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In this master thesis we explore the relationship between morally driven companies and their financial returns. To assess the morality of the company, we have used scores based on a company’s environmental, social and governmental performance. The scores are based on a trusted 3rd party rating agency. By adding an ESG-score term to the Single-index model and the Fama-French-Carhart model, we were able to empirically assess the effect of each point of ESG score against the return of a given company. Based on 10 years of historical data we were able to find both statistical and economically significance that each point of ESG turned out to reduce the expected return annually with 0,147 %. Moving from the 25 % highest rated to the 25 % lowest rated in terms of ESG (in our sample) would yield an annually increased return of 3,10 %. This numerical figure was the same for the single-index model and the Fama-French-Carhart model. We also test for country differences and sector differences where we find statistical significance differences in return for Italy and France and the Energy sector. These differences are also correlated with the return in ESG score. Furthermore, we reduced our sample to check if there were differences when using 5 years, 2 years and 1 year of data. Results then showed to be inconsistent and we could not find statistical significance for these estimated time periods.
Master's thesis in Applied finance