Template-type: ReDIF-Paper 1.0
Author-Name: Ian Berk
Author-Name: Massimo Guidolin
Author-Name: Monia Magnani
Title: Strong vs. Stable: The Impact of ESG Ratings Momentum and their Volatility on the Cost of Equity Capital
Abstract: We test the performance of two ESG score-driven quantitative signals on a large, multi-national crosssection of European stock returns. In particular, we ask whether in the cross-section, the cost of equity capital is more strongly affected by the (upward) “slope” (identified as momentum over a period of time) of their ESG scores or by their “stability” (identified as the volatility of the scores over a period of time), measured around a given slope. We find that 1 month, short-term ESG momentum is priced in the cross-section of stock returns and that it lowers the ex-ante cost of capital (at the same time causing realised ex post average abnormal returns). Short-term ESG momentum may represent a novel, priced systematic risk factor. There is equally strong evidence that a ESG spread strategy that buys (sells) low (high) ESG score volatility stocks leads to a significant alpha and alters the ex-ante cost of capital. Both quantitative ESG signals lead to portfolio sorts and long-short strategies that increase the speed of improvement of the aggregate sustainability profile of the resulting portfolios with no costs in terms of average ESG scores or their stability 
Classification-JEL: G11, G12, C59, G24  
Keywords: ESG ratings, ESG momentum, ESG score volatility, cross-sectional pricing, systematic risk factor.
Length: 52
Number: 23202
Creation-Date: 2023
File-URL: https://repec.unibocconi.it/baffic/baf/papers/cbafwp23202.pdf
File-Format: application/pdf
File-Size: 1.33 MB
Handle: RePEc:baf:cbafwp:cbafwp23202