ESG Confusion and Stock Returns: Tackling the Problem of Noise / Florian Berg, Julian F. Koelbel, Anna Pavlova, Roberto Rigobon.

Format:

Book

Author/Creator:

Berg, Florian.

Contributor:

National Bureau of Economic Research.

Koelbel, Julian F.

Pavlova, Anna.

Rigobon, Roberto.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30562.

NBER working paper series no. w30562

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

How does ESG (environmental, social, and governance) performance affect stock returns? Answering this question is difficult because existing measures of ESG perfor- mance -- ESG ratings -- are noisy and, therefore, standard regression estimates suffer from attenuation bias. To address the bias, we propose two noise-correction procedures, in which we instrument ESG ratings with ratings of other ESG rating agencies, as in the classical errors-in-variables problem. The corrected estimates demonstrate that the effect of ESG performance on stock returns is stronger than previously estimated: after correcting for attenuation bias, the coefficients increase on average by a factor of 2.6, implying an average noise-to-signal ratio of 61.7%. The attenuation bias is stable across horizons at which stock returns are measured. In simulations, our noise-correction pro- cedures outperform the standard approaches followed by practitioners such as averages or principal component analysis.

Notes:

Print version record

October 2022.