Impact of Environmental, Social and Governance (ESG) Factors on Stock Returns of Emerging Markets

Abstract

Empirical evidence indicates that environmental social and governance (ESG) practices are associated with firm financial performance, but little is covered about investors’ attention towards stock performance. In this paper, we conduct a test of the relationship between ESG performance disclosures and the firm’s financial or capital market performance. We choose a stratified sample of large-cap firms across 8 sectors drawn from the S & P 100 during the period 2016 to 2021. The changes in ratings, namely, governance, environment, exhibit a small but significant impact on the stock’s performance during the periods. Our results show that few of the ESG disclosures are positively related and dominate over the usual firm-level determinants of ROA (Return on Assets). We find governance practice is more significant than climate disclosures. These outcomes are robustly demonstrated on use cases of top stocks with investor safety recommendations. The results could have useful implications for investors, fund managers and regulators.