Abstract
We examine the effect of environment, social, and governance ( ESG ) score on stock returns in the United Kingdom (UK). Consistent with Hong and Kacperczyk (2009), Bolton and Kacperczyk (2021), and Pedersen et al. (2021), firms with lower ESG earn higher returns than those with higher ESG . The environment and social premiums are more pronounced than the ESG premium. To understand the premium, we show that the ESG premium is significant for low liquidity securities but not for high liquidity securities, which suggests that ESG is likely associated with stock liquidity. • We examine the effect of ESG score on stock returns in the United Kingdom. • Firms with lower ESG earn higher returns than those with higher ESG. • The ESG premium is only significant for low liquidity securities. • Our work has useful implications for investors and managers.
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