Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: Investments considering corporate social responsibility continue to expand. Are companies pursuing a CSR agenda benefiting shareholders by reducing their financial downside risk? This paper investigates the relationship between a firm’s environmental, social and corporate governance (ESG) scores and its downside risk on the stock market. We study this link using a panel of 887 stocks listed in five European countries over the period 2005-2017. Our empirical results show that higher ESG scores are associated with reduced downside risk of stock returns. Based on the Fama-French three factor model, we found no systematic relationship between ESG and the level of risk-adjusted return.

Keywords: ESG; Value at Risk; Risk-adjusted return; stock market; panel data

JEL-codes: D22; G11; G14; G32

26 pages, March 6, 2019

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