ESG investment performance and global attention to sustainability

Abstract

• The relationship between ESG and returns is weak, suggesting ESG information is well reflected in stock prices. • In the early 2010s, pursuing sustainable investments may have involved some compromise in financial performance. • ESG investment performance is influenced by global attention to sustainability. • Companies with strong management gain advantages during periods of increasing global sustainability attention. We analyze ESG-based investments in stocks across 23 developed markets using daily data from 2004 to 2022. The findings suggest a weak relationship between the ESG ratings and expected returns, with some evidence of modest underperformance of high ESG stocks compared to lower-rated ones in specific periods. This outcome indicates that stock prices have already reflected ESG information, and well-known asset pricing factors can effectively capture the returns of portfolios based on ESG ratings. However, the strength of this relationship depends on global attention to sustainability, where high ESG-rated stocks tend to gain advantages during unexpected attention increases, highlighting the dynamic, nonlinear nature of this relationship.

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