Understanding ESG investing using higher return moments

• We examine the relationship between ESG performance and higher return moments. • We find positive(negative) association between ESG and return skewness(kurtosis). • We explain the abnormal returns from ESG investing using kurtosis risk. • We highlight the significance of skewness and kurtosis risk management. • We support the tendency to de-‘ESG’, moving away from ESG investing. This study explores the link between environmental, social, and governance (ESG) performance and higher return moments (i.e., skewness and kurtosis) addressing a key research gap. It hypothesizes that firms with stronger ESG performance exhibit higher return skewness due to improved market perception and reduced downside risk, as well as lower return kurtosis resulting from better risk management and financial conservatism. Investors accept lower mean returns in ESG firms due to skewness preference and kurtosis aversion, a theory-supported notion. Empirical findings confirm these expectations, clarifying the significance of skewness and kurtosis risk management for ESG investors.