Corporate Social Responsibility and Financial Performance, An empirical study

Abstract

In the last few decades, the social impact of the corporate world has become increasingly important to the society. This has resulted into an increased awareness of the corporate social responsibility (CSR) of the corporate world. This has led to an increase in the so- cially responsible investing (SRI) that invest only in CSR compliant assets. At the time of conducting this thesis research, the increased availability of ESG related ratings have be- come increasingly integrated into the traditional data based investment decision process. This thesis is attempting answer the question whether the companies that have a high ESG rating exhibit a superior financial performance. This study initiate this study by re- viewing earlier research results and fundamental theories in both ESG and financial ar- eas. The thesis problem statement is split into research hypothesis. The first hypothesis is trying to understand whether the stocks of companies with high ESG ratings show a better performance than stock of companies with low ESG ratings. The second hypothe- sis tries to understand whether companies with high ESG ratings are significantly ex- posed to the profitability and investment factors of the Fama and French’s six factors asset pricing model. The profitability and investment factors are used as they are con- sidered key measures of the expected return of a corporation.

The used ESG related rating that are used in the study encompasses the ESG rating, the ESG 10 sub-categories rating and the newly published ESG controversies rating. The em- pirical analysis is separated into distinct parts. In the first part of the analysis, the ESG and the 10 ESG subcategories rating are considered over the full 15 years form 2006 to 2020. The created portfolios are not rebalanced every year, but the average of the col- lected scores are computed. In the second part, ESG and ESG controversies ratings are considered for the same time period of 2006 to 2020. Initial portfolios based on the 2006 data are created.

The outcome of the thesis research is that hypothesis 1 is rejected as the research failed to show that high ESG and high ESG controversies rated portfolios perform better than low ESG and high ESG controversies rated portfolios. The hypothesis 2 is also rejected as the analysis failed to show that ESG rating based portfolios are exposed to the profita- bility factor and that ESG controversy based portfolios are exposed to the profitability and investment factors. This leads the research to concluded that it has not successfully shown that highly ESG related ratings of companies have a positive effect on their stock’s performance.