Do ESG scores matter in the market?: Environmental, Social and Governance performance in relation to stock returns and profitability in European Market

Sammanfattning: This paper examines the effect of European corporates’ sustainability performance on their economic and financial performance. The sustainability performance is represented by ESG scores in this paper. ESG evaluates the sustainability performance in environmental, social and governance aspects. The financial performance is measured as the average monthly stock return from January 2002 to July 2018. For the economic performance, sales, operating margin and return on invested capital (ROIC) are employed. To evaluate the significance of the effect of ESG ratings on economic and financial performance, econometric analyses based on capital asset pricing model is conducted as main methodologies: cross-sectional regressions and multifactor model using factor mimicking portfolios according to Fama and French (1992; 1993). The main result of the first analysis extrapolates that ESG score has a significant and negative influence on both economic and financial performance of European corporations. The results from second analysis asserts that ESG can contribute to generate risk adjusted returns.