Corporate Governance, ESG, and stock returns
around the world
Companies’ performance on environmental, social, and governance (ESG) issues has garnered increasing attention in the past decade from various parties, including customers, employees, public interest groups, and government regulators. Companies, in turn, are increasingly ESG aware, and many have undertaken initiatives to improve performance on ESG issues, have conducted management roadshows with investors to showcase their ESG practices, and have begun publicly reporting their ESG efforts in their annual reports. Against this backdrop, investors have been scanning for potential rewards and risks in this information. Is there a relationship between companies’ stock return performance and their ESG performance (“ESG” hereafter)? A key challenge in examining the return predictability of ESG is how to measure it. I drew on prior academic literature and the concept of ESG materiality to motivate and develop a new measure of ESG. I then tested the return predictability of the measure in a global investable universe.