New ESG rating drivers in the cross‐section of European stock returns

Author:

Berk Ian1,Guidolin Massimo2,Magnani Monia3ORCID

Affiliation:

1. Bocconi University Milan Italy

2. Department of Finance, Green, and Baffi Carefin Centre Bocconi University Milan Italy

3. University of Liverpool Management School United Kingdom

Abstract

AbstractWe assess the performance of two quantitative signals based on ESG scores across a large, multi‐national cross‐section of European stock returns. We test whether the cost of equity capital is more influenced by the upward momentum (measured over time) of the ESG scores of the firms issuing stocks or by their stability (identified as the volatility of the scores over time), measured around a changing mean level. We find that short‐term ESG momentum over 1 month has a significant impact on the cross‐section of stock returns, lowering the anticipated cost of capital and leading to positive average abnormal returns. This suggests that short‐term ESG momentum may represent a novel, priced systematic risk factor. Furthermore, we find strong evidence that an ESG volatility spread strategy which buys low ESG score volatility stocks and sells high volatility ones, generates a substantial alpha and affects the ex‐ante cost of capital. Both quantitative ESG signals result in portfolio sorting and long‐short strategies that enhance the overall sustainability profile of the issuing firms without compromising the raw average of their ESG scores.

Publisher

Wiley

Subject

Finance,Accounting

Cited by 1 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. Exploring the Ethical Perspectives of Sustainable Finance;Advances in Business Strategy and Competitive Advantage;2024-08-30

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