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The impact of Social Responsible Investing on the European Stock Market

Dollee, Alexander (2019)

 
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Dollee, Alexander
2019
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This thesis investigates possibility to generate abnormal returns on the European market, by applying various Social Responsible Investment strategies. A significant amount of academic literature suggests there to be a connection between higher ESG-rated stock portfolios and abnormal returns, while others deny such notion. Using a set of various ESG-values obtained from the Thomson Reuters ASSET4 database, financial data from the Datastream database and factor-data from Kenneth R. French database, this thesis attempts to investigate the financial performance of SRI in Europe. The thesis uses stock-information from 18 different European countries, applying the Carthart (1997) four-fac-tor model and CAPM single-factor model, to construct portfolios based upon different ESG-scoring strategies. This research concludes that Social Responsible Investing does outperform the market, but only when applying a social investment screen that focusses on highly governance ranked companies. There are no significant or abnormal returns regarding the social and environmental dimension, besides the Positive and Best-in-Class SRI strategies.

This thesis, in order to research the impact of Social Responsible Investing, employs three different SRI investment strategies, being a Positive, Best-In-Class and E-S-G investment strategy, during the same time period. This thesis finds that over the whole sample period, SRI underperforms compared to the market or investing in low ESG-ranked stocks, as well as generating lower Treynor Ratio’s and/or Betas, with the Governance 10% cut-off portfolio being the exception, generating a 6.4% return annually.

Using a sample period of 10 years for stock returns from January 2007 to January 2017 and ESG-data from December 2006 to December 2016, this thesis finds that portfolios screened with a Positive and Best-In-Class, combined with a cut-off rate of 10, 15, 20 and 25%, neither over or underperform on the general European stock universe. In addition the Long-Short investment strategy produces counterproductive results due to the better performing nature of low ranked ESG portfolios, as well as lower Treynor-ratios. The E-S-G approach only returns significance for Governance portfolios on a 10% basis.
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