ESG Uncertainty and Stock Returns in Europe

Abstract

In this paper we analyze whether ESG uncertainty can predict stock returns by studying the 3000 largest common stocks within Europe. We observe a tendency of predictability between ESG uncertainty in the aggregated ESG score and future stock returns, but no significant premium when controlling for known risk factors. However, the average ESG rating seems to be a more important predictor of stock returns, as the environmental dimension yields a premium from stocks with low ESG ratings also after controlling for known risk factors. We observe that in general, companies with higher book-to-market values and high volatility stocks have greater ESG uncertainty while firms with higher market capitalization and leverage have the opposite effect. Accordingly, we observe that firm characteristics are an important attribute to consider when examining the disagreement among ESG providers.