ESG and the market return

Author

Ran CHANG
Liya CHU
Jun TU, Singapore Management UniversityFollow
Bohui ZHANG
Guofu ZHOU

Publication Type

Working Paper

Version

publishedVersion

Publication Date

10-2021

Abstract

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.

Keywords

ESG, Return Predictability, Partial Least Square, Elastic Net, Out-of-sample Forecast

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

60

Identifier

10.2139/ssrn.3869272

Publisher

SSRN

Citation

CHANG, Ran; CHU, Liya; Jun TU; ZHANG, Bohui; and ZHOU, Guofu. ESG and the market return. (2021). 1-60.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6899

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://doi.org/10.2139/ssrn.3869272