Risk, return, and environmental and social ratings

We analyze the risk and return characteristics across firms sorted by their environmental and social (ES) ratings. We document that ES ratings have no significant relation with average stock returns or unconditional market risk, and we provide evidence that these non-results are not due to low statistical power. Stocks of firms with higher ES ratings do have significantly lower systematic downside risk, as measured by downside beta, relative downside beta, coskewness, and tail risk beta. Nevertheless, the economic magnitude of such reduction in downside risk is small. Our results suggest that stock investors who derive non-pecuniary benefits from ES investing can engage in it without sacrificing financial performance.