Pricing sustainability risks

: ESG scores and stock returns in emerging markets

Abstract

Sustainable investing has become an increasingly important topic with investors seeking ethical investment options and financial gains through risk mitigation. Extensive research exists on how investors incorporate sustainability in U.S. and European markets. In emerging markets, investor responses to sustainability risks are less explored. My research aims to answer whether investors in these markets demand higher risk premia for firms more exposed to ESG risks. Using emerging market data from 2014 to 2023, I examine how ESG, ESGC, and Social Scores affect stock returns through cross-sectional and time-series analyses. The findings indicate that investors demand a premium on stock returns for higher ESG risk exposure during economic crises. Further, profitability moderates the impact of ESG risks in emerging markets. Finally, country-and-industry-specific characteristics significantly influence sustainability risk premia. Overall, this study contributes to the understanding that investors price sustainability-related risks in emerging markets.

Date of Award	14 Feb 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Zoe Venter (Supervisor)