The ESG paradigm: assessing the ESG relevance on risk premia

In the last twenty years, environmental footprint, social responsibility, and corporate governance (ESG) factors have played a crucial role in the financial environment, especially when it comes to selecting investments and assessing financial performance. This dissertation addresses two main questions: (i) Are ESG scores related to the stock returns, i.e., Is it possible to do well while doing good? (ii) Does the method used to identify the ESG premium affect the results? To answer those questions, the analysis is based on the method illustrated in Chasing ESG, by Lioui and Tarelli (2022). The reference method compares two dominant methodologies for constructing an ESG factor: the time series (ratings used to order stocks) and cross-sectional methods (ratings used to weigh stocks). The analysis is replicated in the European stock market through. The Bloomberg database provides comprehensive data on ESG and other fundamentals to carry out all the assessments. The analysis I implemented has documented significant variability in the factor-alpha across time. However, it did not provide substantial support for a relation between ESG score and stock returns. Nevertheless, it has enforced the relevance of the approach adopted in analyzing ESG premiums.