Determining the Effects of Aggregate and Disaggregate ESG Ratings on Abnormal Stock Returns (thesis)

Abstract

This paper examines the effects of Environmental, Social, and Governance (ESG) ratings and their component parts on excess stock returns for 719 firms in the S&P 1500. Although no relationship was found between aggregate ESG ratings and excess returns, novel findings between the disaggregated ESG score and excess returns were identified, including a negative relationship for the Environmental (E) score, a positive relationship for the Social (S) score, and a statistically insignificant relationship for the Governance (G) score. The effects of firm size on these relationships were also analyzed, yielding no significant results for small firms. However, the relationship between excess returns for large firms and ESG ratings yielded similar results to the overall sample size. Finally, this paper confirms the positive relationship between firm size and aggregate ESG ratings and expands upon this notion by determining significantly positive correlations between the E and S score and firm size, and a marginally significant positive relationship for the G score. This paper contributes to extant literature by examining the underlying factors effecting the ambiguous relationship between aggregate ESG scores and excess returns.