Shades of green

: the bidirectional dynamic ESG-return relationship across global markets

Abstract

This study empirically investigates the relationship between ESG scores and annual stock returns in a dynamic, bidirectional setting, addressing conflicting positive, negative, and insignificant links presented in prior literature. It presents robust evidence of a global negative ESG premium associated with the environmental and social dimensions. This effect is driven by highly liquid firms and those with low passive ownership, while it vanishes in emerging markets and in firms with low ESG scores. Further, a reverse impact of returns on ESG exists, which is driven by prior underperformance and materializes through the governance pillar. The results highlight the importance of modeling the ESG-return nexus as a dynamic endogenous system and indicate that the relationship is not uniform but bidirectional, dimension-specific, and mediated by the level of ESG, level of returns, liquidity, ownership, and firm-specific responses to past performance. Overall, the findings help to reconcile conflicting views on the ESG-return nexus.

Date of Award	21 Oct 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Zoe Venter (Supervisor)