Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk?

Using detailed data on seven environmental, social and governance (ESG) attributes for a long panel of large publicly traded US firms during July 1992–June 2008, only community relations were found to have had a positive effect on risk-adjusted stock returns, which effect was not compensation for risk but could be due to mispricing. Additionally, a changing effect of employee relations was found, from positive during July 1992–June 2003 to negative during July 2003–June 2008. The positive effect could be due to mispricing, whereas there is some evidence that the negative effect was compensation for low non‐sustainability risk. A weak negative effect of human rights and product safety indicators on risk‐adjusted stock returns in the more recent period was also found to be likely due to mispricing. The implications are that certain ESG attributes might be value relevant but they are not efficiently incorporated into stock prices. Copyright (C) 2011 John Wiley & Sons, Ltd and ERP Environment.SRI , sustainability , risk‐factor test , market efficiency ,