Doing Well by Doing Good? Risk, Return, and Environmental and Social Ratings

We analyze the risk and return characteristics across portfolios of firms sorted by their environmental and social (ES) ratings. We document that ES ratings have no statistically significant relationship with average stock returns nor unconditional market risk. Firms with high ES ratings do have significantly lower downside risk than firms with low ES ratings. However, a firm's downside risk decreases by only 2–4% of its interdecile range for an interdecile-range increase in a firm's ES score. Our results suggest that the risk-return profile of ES firms cannot be the sole rationale for ES investing.