ESG-SCORE & ABNORMAL RETURNS IN THE EUROPEAN MARKET

Abstract

This thesis investigates if investing in European stocks based on Environmental, Social, and Governance (ESG) scores can generate abnormal returns from 2011 to 2021. By performing positive, best-in-class, and negative screening approaches, we construct a long-short strategy going long the 10% top-rated firms and short the 10% bottom-rated firms. Similar to Kempf and Osthoff (2007) and Statman and Glushkov (2008), we employ the Carhart 4-factor model and further extend with a Fama-French 5-factor, including the momentum model. Overall, we find evidence that the long-short strategy achieves negative abnormal return for the positive, best-in-class, and negative screen. Additionally, we find no evidence that high-rated ESG firms yield lower systematic risk.