ESG and the market return

ESG and the market return

We propose an environmental, social, and governance (ESG) index. We find that it has significant power in predicting the stock market risk premium, both in- and out-of-sample, and delivers sizable economic gains for mean-variance investors in asset allocation. Although the index is extracted by usin...

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Bibliographic Details
Main Authors: CHANG, Ran, CHU, Liya, Jun TU, ZHANG, Bohui, ZHOU, Guofu
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2021
Subjects:
ESG
Return Predictability
Partial Least Square
Elastic Net
Out-of-sample Forecast
Finance and Financial Management
Portfolio and Security Analysis
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/6899
https://ink.library.smu.edu.sg/context/lkcsb_research/article/7898/viewcontent/SSRN_id3869272.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:We propose an environmental, social, and governance (ESG) index. We find that it has significant power in predicting the stock market risk premium, both in- and out-of-sample, and delivers sizable economic gains for mean-variance investors in asset allocation. Although the index is extracted by using the PLS method, its predictability is robust to using alternative machine learning tools. We find further that the aggregate of environmental variables captures short-term forecasting power, while that of social or governance captures long-term. The predictive power of the ESG index stems from both cash flow and discount rate channels.

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