Impact of ESG Ratings on the Returns of Firms

Student Name

Shahzeb AyazFollow


Master of Science in Finance


Department of Finance


School of Business Studies (SBS)

Date of Submission

Fall 2023


Dr. Hilal Anwar Butt, Professor and Chairperson, Department of Finance

Submission Type

Research Project

Document Type

Restricted Access


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Purpose – The purpose of this research is to examine the impact of ESG ratings on the returns of the companies based on their size and value.

Methodology/Approach – The study includes the monthly data of 1451 listed companies on the New York Stock Exchange (NYSE) for the business years 2011-2021. Data is collected from the Refinitiv Database. Refinitiv ESG score is used to show the ESG performance of companies. A regression analysis has been carried out through the Fama French 3-factor model and Fama-MacBeth regression to determine the linkages between the ESG performances of the companies with the market returns. Equally weighted and value-weighted portfolios have been created based on smaller size, bigger size, lower and higher book-to-market ratio for growth and value firms.

Findings – The findings through Fama-MacBeth regressions indicate that with one standard deviation change in ESG scores, the market returns tend to increase by 2.9% for all the firms and 3.5% for smaller firms annually. The difference in expected returns between firms with higher and lower ESG scores is 7.7% for all the firms and 9.2% for smaller firms annually. It shows a positive relation between ESG scores, and the market returns of the firms. It is further complemented by the Fama French portfolio analysis where the smaller firms with higher ESG scores in comparison to lower ESG scores yield 2.4% additional annual returns in equally-weighted portfolios and 4.8% annual returns in value-weighted portfolios. The value firms yield 2.4% additional annual returns for higher ESG scores in equally weighted portfolios.

Originality/Value Addition – The study contributes to sustainable finance empirical research through the impact of ESG on a large dataset of the US market including the impact based on different sizes and value of firms. It also significantly adds value to individual investors and Asset Management Companies when making rational investment decisions.

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