Doing good and doing well: The relationships between ESG and stock returns of REITs

Abstract The study empirically tests the relationships between environmental, social, and governance (ESG) ratings and the stock performance of real estate investment trusts (REITs). It also examines the effects of climate change risk salience of REIT investors on excess market risk premia for REITs with and without ESG ratings. Using 413 REITs from the United States and other developed countries from 2018 to 2022, our empirical results show significant negative relationships between ESG ratings and ex post stock returns of REITs. We find that ESG‐rated REITs underperform non–ESG‐rated REITs by up to 2.4% in monthly price returns and 1.7% in monthly total returns. We also estimate lower excess market risk premia in the capital asset pricing models (CAPMs) for ESG‐rated REITs. However, the estimated risk premia for ESG‐rated REITs are not correlated with climate risk concerns. We find that ESG‐rated REITs incurred high compensations for the Board and Senior Management.