The Relationship Between Environmental Social Governance Factors and U.S. Stock Performance

Abstract

The focus by investment practitioners on the impacts of non-traditional environmental and governance issues has intensified in recent times as a result of global events. Most studies examine the relationship between environmental social governance (ESG) factors and portfolio returns. This article extends those studies by analyzing the impacts on stock valuation and operating performance of U.S. listed companies. Using a multifactor framework, the article provides evidence of a significant positive relationship between particular ESG rating criteria and both return on assets and market-to-book-value measures, supporting the theory that Corporate Social Performance is positive for Corporate Financial Performance. Analysis also shows that employment conditions are a more relevant influence than other stakeholder criteria and that a company’s involvement in more general non-stakeholder-related social issues contributes negatively to both operating performance and stock return.

TOPICS: ESG investing, security analysis and valuation, performance measurement