A0661
Title: Understanding the ESG score effects on stock returns using mediation theory
Authors: Gaelle Le Fol - Universite Paris - Dauphine, and CREST (France) [presenting]
Serge Darolles - Universite Paris - Dauphine (France)
Yuyi He - Chinese University of Hong Kong (Hong Kong)
Abstract: The influence of ESG scores on stock returns is investigated. The objective is to use these scores to study the channels through which the ESG effects are transmitted (if any). The theory of the ESG transmission mechanism comes through essentially two channels: the "investor demand channel" and the "fundamentals or profitability channel." However, in practice, these effects are difficult to identify and quantify. To tackle this problem, a causal mediation analysis is proposed. This approach not only allows for seeing whether common ESG scores can predict future returns but also to identify the channels at play. The results show that ESG scores have a real effect on stock returns and that the transmission channels are not the same depending on the awareness of institutional investors (ESG-aware vs ESG-unaware) as well as on the dimension - either E, S, G or global ESG - of focus. Results show that ESG scores indeed contain information that can be exploited by asset managers.
