Using ESG disclosure score as an investment tool – evidence from Finnish stock market

Abstract

The concept of socially responsible investing has increased rapidly over the past two decades as the investors are demanding such practices and the company’s ecological, social and governance issues are capturing more media coverage. The purpose of this thesis is to study the effect of company’s ESG disclosure score on its performance. ESG disclosure score measures the amount of information disclosed by company on ecological, social and governance issues.

Thesis is conducted using a data of daily stock returns from Finnish stock exchange between the years 2006 and 2016. Companies from Helsinki stock exchange are divided into two equally- weighted portfolios using ESG disclosure score provided by Bloomberg as a divider. ESG portfolio includes companies that disclose some of the ESG information while non-ESG portfolio includes company with no ESG disclosure score. The portfolios are rebalanced after each year based on the changes in ESG disclosure score.

Results suggest that the usage of company’s ESG disclosure score as an investment screen does not lead to a significant over or underperformance. Furthermore, neither of the sample portfolios are able to create positive alphas during the sample period. Difference between the performances of the two portfolios are explained through exposure to market risk. The performance of the sample portfolios is also tested against different market conditions by dividing the sample period into crisis and non-crisis periods. Evidence from the thesis indicates that ESG portfolio generates positive alphas during the non-crisis period and negative alphas during market turmoil while the opposite is true for the non-ESG portfolio. While the portfolios are able to generate positive alphas during market turmoil while the opposite is true for the non-ESG portfolio. While the portfolios are able to generate positive alphas during different market conditions, neither are statistically significant. Furthermore, evidence from the analysis of different market conditions indicate that non-ESG portfolio includes more defensive stocks as it is able to create positive alphas during market crisis period.