Abstract
Based on an extensive international dataset containing Thomson Reuters environmental, social and corporate governance (ESG) rating, as well as Thomson Reuters newest controversies and combined score of an average of 2500 companies in the years 2002–2018, this article contributes to the existing discourse of the relationship between corporate social performance and corporate financial performance (CFP) by examining the Fama and French (J Financ Econ 116(1):1–22, 2015) five-factor risk-adjusted performance of positive screened best and worst portfolios, based on a 10% cutoff, respectively, for equally, value- and rank-weighted strategies in the European, US and global market. Furthermore, the controversies score allows us to examine the mid-to-long-term effects of scandals on the CFP without having to rely on the event study methodology. Even though a value-weighted strategy does not show any significant abnormal returns, we examined a significant outperformance for equally weighted worst ESG portfolios and best controversies strategies. These results strongly indicate that this is, on the one hand, driven by low-rated smaller companies (“small sinners”) and clean-coated firms with regard to controversies (“silent saints”) on the other hand. The findings hold for several robustness checks such as adjusting the cutoff rates or splitting the dataset across time.
Highlights
The interaction between corporate social performance (CSP) measured by ESG scores and their corporate financial performance (CFP) has been the subject of academic research for many years with various findings
Concerning the Sharpe ratio, the Sortino ratio and the Treynor ratio, it is noteworthy that all controversies best and TR worst portfolios show higher values than the respective market portfolio, which is a first indication that the performance of these portfolios is high
Most best and worst portfolios have a higher risk than their respective market in terms of maximum drawdown (MDD), while the controversies best-minus-worst portfolios have a much lower risk in all three markets
Summary
The interaction between corporate social performance (CSP) measured by ESG scores (which evaluate the performance of companies in their environmental, social or corporate governance pillars) and their corporate financial performance (CFP) has been the subject of academic research for many years with various findings. This paper is the first to examine the mid-to-long-term effects of controversies, as the new dimension of ESG, on the CFP of listed companies in a portfolio context. It determines the impact of different weighting strategies for high- and low-rated ESG and controversy portfolios. Revelli and Viviani (2015) report in their recent meta-analysis that the consideration of CSP in a portfolio. Dorfleitner et al (2015) and Chatterji et al (2016) report a lack of homogeneous ESG measurement concepts, even among the large international ESG rating institutions
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