Abstract
This paper finds that environmental, social, and governance (ESG) risks generate negative long-run stock returns. A value-weighted portfolio of firms with high ESG risks exhibits a four-factor alpha of −3.5% per year, even when controlling for other risk factors, industries, or firm characteristics. The negative alpha stems from unexpected costly ESG incidents and from negative earnings surprises. These findings make three contributions. First, weak corporate social responsibility (CSR) destroys shareholder value. Second, stock markets fail to incorporate the consequences of intangible risks. Third, shorting firms with high ESG risks is a profitable socially responsible investing (SRI) strategy.
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