ESG-RATING AND CORPORATE FINANCIAL PERFORMANCE : EVIDENCE FROM THE ENERGY SECTOR

Abstract

During the recent years increased uncertainty about environmental sustainability has at-tracted investors to implement socially responsible practices in investment decisions. This thesis examines the relationship between companies’ ESG-ratings and financial per-formance measured by stock market returns in the energy sector. Previous academic studies in this area have provided mixed results. Most of the studies suggest that there is a connection between high ESG-rated companies and abnormal returns in market tur-moil as responsibility is perceived as a risk-mitigating factor. However, during a bull market, ESG-portfolios do not create alpha since their investment universe is restricted.

This thesis contributes to the existing literature by focusing on the energy sector which is widely polarized regarding the responsibility of the companies operating in the industry. The data consists of 72 energy companies around the world. Three portfolios are con-structed, one to represent the companies with the highest ESG-ratings, one to imitate the performance of companies with the lowest ESG-ratings and one which is long on the high rated portfolio and short on the low rated portfolio. The sample period is split into a bull market, 2013-2019 and crisis period 2020 to examine how these portfolios per-form during different market conditions. In order to find empirical results, the capital asset pricing model with Fama and French three factor model is applied.

Empirical findings of this study are mainly in line with previous studies. The companies with the lowest ESG-ratings tend to outperform other portfolios during normal market times. Also, surprisingly the portfolio with lowest-rated companies performed better than the portfolio with the highest-rated companies. Thus, investors did not find protec-tion from the most responsible companies during the market turmoil. One of the major factors impacting results was the energy sector’s poor performance during the whole sample period overall.