Stock Return Comovement around the ESG Index Revision in Korea

Abstract

This article examines the impact of additions or deletions to the ESG index on stock return comovement in the Korean stock market over a 10-year period from 2010 to 2019, using eight ESG indices. Our results show that firms added to the ESG index experience an increased beta, both in the short- and long-term, while deleted stocks from the ESG index show significant decreases in beta. The return comovement following ESG index changes identifies not only the initial ESG index but also the new ESG index launched in 2015. However, comovement to the ESG index inclusion is more pronounced with the initial ESG index. Moreover, we find that comovement largely accounts for the trading behavior of individual investors and is partially related to foreign investors’ trading. Our findings are consistent with previous evidence on comovement with changes in major market index constituents and suggest that ESG index revision by considering non-financial factors also induces stock return comovement. These results can be explained by the investor sentiment-based views.