Investigating an Asset Pricing Model with Environmental, Social, and Governance Factors

Swanson, R.J.

Investigating an Asset Pricing Model with Environmental, Social, and Governance Factors

Persistent URL

https://hdl.handle.net/10456/57649

Author(s)

Swanson, R.J.

Date Issued

April 8, 2024

Abstract

Considering companies' environmental, social, and governance (ESG) factors has proven to be an effective method for investing for both intrinsic benefit and financial performance. However, research still has not concluded the exact relationship between ESG factors and a company’s economic performance. This paper furthers the research in the ESG investing space by quantifying how the relationship between ESG variables connects to industry. The study centers around stocks held in the Vanguard ESG US Stock ETF, one of the most widely used ESG ETFs in the United States. An ETF is a bundle of securities sold in shares on a stock exchange. This study measures ten stocks each for two industries: technology and consumer staples. Bloomberg ranks greenhouse gas emissions as a top priority for the technology sector and a somewhat low priority for consumer staples, so this data is collected on each company to compare any differences in financial performance based on industry. An additional variable, gender diversity on the firm’s board of directors, is included to see its impact on stock returns. The data is run through a series of regressions using Fama and French’s five-factor model with the two additional ESG variables. The results for the two ESG variables are mixed. There is little relationship between greenhouse gas emissions and excess stock returns, but there is promising evidence for women on the board of directors and financial performance.

Major

Economics

Honors

Business and Economics, 2024

First Reader(s)

Bianco, Timothy P.