The impact of Social Responsible Investing on the European Stock Market

Abstract

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.