Your Essential Guide to Sustainable Investing by Larry E. Swedroe & Samuel C. Adams

Author:Larry E. Swedroe & Samuel C. Adams
Language: eng
Format: mobi, epub
Publisher: Harriman House
Published: 2022-04-04T22:00:00+00:00

Following is a summary of his findings:

Firms’ past ESG incident rates predict more incidents, weaker profits, and lower risk-adjusted stock returns—suggesting that poor ESG practices negatively impact firm performance through a higher probability of new incidents.

Conventional ESG ratings show less predictive power for future incident news than past ESG incident rates.

A value-weighted U.S. portfolio with high ESG incident rates is associated with a statistically significant negative alpha of about -3.5 percent per year, translating into a yearly shareholder value loss of about $186 billion. The pattern is robust to risk factors, industries, outliers, and other robustness checks, including his European market finding of a statistically significant -2.5 percent a year return for the value-weighted portfolio.

Lower risk-adjusted returns are caused by analyst forecast errors as well as lower returns around earnings announcements and subsequent incidents—past ESG incident rates predict negative sell-side earnings surprises, suggesting that analysts overestimate the earnings of firms with high incident rates. This result was robust to analyst-year and industry-year fixed effects and thus cannot be explained by analyst or industry characteristics. When firms with past high ESG incident rates announce their quarterly earnings, abnormal returns are about -1.4 percent per year.

High ESG incident rates are associated with a significantly higher disagreement among conventional ESG ratings. The finding that more incidents correlate with more rating disagreement could be the result of greenwashing activities—the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound—which can lead to mispricing.

Firms with high incident rates experience incidents in all ESG dimensions (environmental, social, and governance).

Limits to arbitrage cannot explain the lower returns to high ESG incident rates.

In December 2014, the most common industries of the 95 firms with a high incident score were banking (9 firms), pharmaceutical products (8), retail (8), business services (7), and petroleum and natural gas (7).

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.