Can sustainability criteria enhance returns and reduce risk on stocks?

Abstract

This thesis investigates whether sustainability criteria can be used to enhance return and reduce risk on stocks. This is done through conducting an empirical analysis on European stocks from 2007-2016, with the purpose of identifying a four-factor model that includes the sustainability score in addition to the three Fama and French factors. The methodology is based upon famous techniques to test asset pricing models, performing one two-pass regression inspired by Fama and Macbeth (1973) and one two-pass regression inspired by Fama and French (1992). The results show that the criteria can be used to obtain higher expected return, less volatility and less company-specific risk by investing in companies with better sustainability scores.