Abstract
Does socially responsible investing pay off? The investigation of 49 developed and emerging markets indicates that environmental, social, and governance ratings negatively predict future stock returns. A decile of global stocks with the highest ESG scores underperforms their low-rated counterparts by 4.68% per year. However, the superior returns on irresponsible companies are driven by the small firm effect. By buying unethical stocks, investors harvest the size premium. Once its role is isolated, the ESG companies no longer differ from their peers.
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