Investing with ESG ratings and the performance of stock returns

This study examines the relationship between ESG ratings and stock returns over the period from January 1, 2006 to December 31, 2023. The model comparison results indicate that the prosed four three-factor model yields lower GRS F-statistics than both the Fama-French three-factor model and the conventional four-factor models. The findings suggest that environmental, social, and governance (ESG) ratings play a potentially significant role in predicting stock returns and therefore should not be disregarded in investment decision-making. The empirical results show that, on average, firms with higher ESG ratings exhibit higher stock returns and lower financial risks. Consequently, the results indicate that ESG-focused investors may derive greater benefits from investing in small-cap portfolios than in large-cap portfolios.