ESG Factors, Returns and Volatility: A Tale From Brazilian Market Data

Abstract

Objective: This study aims to investigate the relationship between Environmental, Social, and Governance (ESG) factors and financial market performance in Brazil. The objective is to understand the impact of ESG scores on firms’ returns and risk profiles, thereby informing investment strategies and policy decisions. Theoretical Framework: The research is grounded in theories of sustainable finance and risk management, with emphasis on how ESG integration can influence financial outcomes. Notable frameworks include Cochrane’s “factor zoo” and the role of investor attention and analyst coverage in mitigating crash risk. Method: Data for the study was obtained from the Refinitiv Eikon database, covering firm-level ESG characteristics and market data, such as returns and volatility. Ordinary least squares (OLS) regression was used to analyze cross-sectional data, exploring the relationship between ESG scores and financial performance metrics across various sectors. Results and Discussion: The results show no significant relationship between returns and ESG scores. However, a negative and statistically significant relationship was found between ESG scores and volatility, suggesting that firms with higher ESG ratings tend to exhibit lower risk. ESG Controversies Score (ECSC) displayed negative correlations with other ESG metrics, indicating that companies involved in controversies tend to have lower overall ESG scores. Research Implications: These findings suggest that while ESG scores may not directly influence returns, they play a role in risk management, highlighting the importance of ESG factors for investors seeking lower-risk profiles. Originality/Value: This research contributes to the understanding of ESG’s role in the Brazilian market, offering empirical evidence on how ESG integration can shape financial performance and risk, providing a nuanced view of ESG’s impact on investment decisions.