ESG ratings of companies' social responsibility play an increasingly important role in investment decisions. This paper contributes to the understanding of the extent to which sustainability considerations are in conflict with or in line with financial performance indicators. This study finds that improved ESG ratings are associated with reduced downside risk of stock returns.
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.