ESG Risk Premia and the Impact of ESG Awareness: Differences between the US and the EMU Markets

Abstract

In this article, the authors analyze the impact of environmental, social, and governance (ESG) investing on stock returns. For this purpose, they follow the notion that higher ESG awareness of investors increases the prices of sustainable stocks. If so, one can hypothesize two opposing relationships for the return: a positive short-term effect and a negative long-term effect. To empirically separate between these two effects, they use Google Trend data as a proxy for ESG awareness. Examining data from 2010 to 2020 from the US and the European Economic and Monetary Union (EMU) markets, the authors find empirical evidence supporting both hypotheses. Moreover, the results show on the individual firm level that sustainable stocks have less exposure to an ESG-Factor and thus earn a lower ESG premium. The comparison of both markets shows that the US market is more mature than the EMU market regarding the transition from a state in which investors do not consider ESG to a state in which investors do consider ESG.