Scandinavian Working Papers in Economics

UiS Working Papers in Economics and Finance,
University of Stavanger

No 2022/3: The expected returns of ESG excluded stocks. The case of exclusions from Norway's Oil Fund

Erika Berle (), Wanwei He () and Bernt Arne Odegaard
Additional contact information
Erika Berle: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Wanwei He: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Bernt Arne Odegaard: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway

Abstract: What are the consequences of widespread ESG-based portfolio exclusions on the expected returns of firms subject to exclusion? We consider two possible theoretical explanations. 1) Short-term price pressure around the exclusions leading to correction of mispricing going forward. 2) Long term changes in required returns. We use the exclusions of Norwegian Government Pension Fund Global (GPFG -`The Oil Fund') to investigate. GPFG is the world's largest SWF, and its ESG decisions are used as a model for many institutional investors. We construct various portfolios representing the GPFG exclusions. We find that these portfolios have significant superior performance (alpha) relative to a Fama-French five factor model. The sheer magnitude of these excess returns (5% in annual terms) leads us to conclude that short-term price pressure can not be the only explanation for our results, the excluded firms expected returns must be higher in the longer term.

Keywords: ESG investing; Exclusion; Oil Fund

JEL-codes: G10; G20

Language: English

23 pages, April 27, 2022

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