Impact of Environmental, Social and Governance disclosure on risk-return performance: An empirical analysis of the STOXX Europe 600 using the Bloomberg ESG Disclosure Score

In the last decades the socially responsible investments market grew rapidly accompanied by a growth in environmental, social and governance (ESG) disclosure by firms. This trend was born out of investors and regulators’ demand for transparency and non-financial information, which reflects a change in investors’ motivations and ways of investing. Notwithstanding, literature bringing disclosure and transparency into focus remains scarce. The aim of this master thesis is therefore to investigate this new information and to examine to what extent environmental, social and governance disclosure, and hence transparency, impacts the European equity market. Building on prior literature, we use a portfolio analysis and Carhart’s extension of the CAPM to shed light on this question. Using the Bloomberg ESG Disclosure Score as a proxy for ESG transparency and as a screening tool, we built leading and lagging portfolios in order to compare their risk-adjusted performance. The empirical analysis was conducted from 2010 until 2017 and is based on a sample of 462 stocks coming from the STOXX Europe 600 index. On the one hand, it seems that transparent firms, represented by portfolios composed of companies with high ESG disclosure score, do not perform differently than the market. On the other hand, we found that less transparent firms seem to outperform the market in some cases. Additionally, in line with previous studies, we found strong discrepancies in firms’ level of disclosure, with larger companies appearing to disclose more information than smaller ones.