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Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries

Year 2025, Issue: 123, 35 - 63, 01.04.2025

Oğuz Şimşek , Serkan Çankaya

Abstract

This study aims to integrate ESG (Environmental, Social, and Governance) scores, a measure of sustainability, into asset pricing models in E-7 countries. To determine whether sustainability has an impact on portfolio performance, all firms with available data were included in the analysis. A new factor created from the ESG scores of these firms was integrated into the model based on the five-factor methodology published by Fama & French (2015). Our findings indicate that while ESG scores have both positive and negative effects in explaining returns, this impact is statistically significant only in Türkiye among the E-7 countries.

Keywords

Sustainable Finance ESG Asset Pricing Models

References

  • Afrooz, Z., & Kruusman, A. (2019). The Effect of the ESG Score on Stock Price Jumps: A Quantitative Study on Nordic Countries [Master’s thesis]. Lund University. https://www.diva-portal.org/smash/record.jsf?dswid=4981&pid=diva2%3A1325390
  • Auer, B. R., & Schuhmacher, F. (2016). Do socially (ir) responsible investments pay? New evidence from international ESG data. The Quarterly Review of Economics and Finance, 59, 51-62. https://doi.org/10.1016/j.qref.2015.07.002
  • Balatbat, M., Siew, R., & Carmichael, D. (2012). ESG scores and its influence on firm performance: Australian evidence. In Australian School of Business School of Accounting, School of Accounting Seminar Series Semester. Vol 2, 1-30. Australia: University of New South Wales, India.
  • Baptista, O. C. A. (2019). The Impact of Esg Criteria on Portfolio Financial Performance (Order No. 28787929). Available from ProQuest Dissertations & Theses Global. (2592265182). https://www.proquest.com/dissertations-theses/impact-esg-criteria-on-portfolio-financial/docview/2592265182/se-2.
  • Boido, C., Ceccherini, P., & D'Imperio, A. (2022). ESG Scores-Is it the new way to build a European portfolio? Journal of Finance and Investment Analysis, 11(3), 1-21 https://doi.org/10.47260/jfia/1131.
  • Breedt, A., Ciliberti, S., Gualdi, S., & Seager, P. (2019). Is ESG an Equity Factor or Just an Investment Guide? The Journal of Investing, 28(2), 32-42.
  • Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of finance, 52(1), 57-82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
  • Celik, S., Aktan, B., Tvaronaviciene, M. & Bengitoz, P. (2017). Linkage between company scores and stock returns. Journal of International Studies, 10(1), 219-232. doi:10.14254/2071-8330.2017/10-4/17
  • De, I., & Clayman, M. R. (2015). The benefits of socially responsible investing: An active manager’s perspective. The Journal of Investing, 24(4), 49-72.
  • Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 51-63. https://doi.org/10.2469/faj.v61.n2.2716
  • Dimson, E., Karakaş, O., & Li, X. (2015). Active ownership. The Review of Financial Studies, 28(12), 3225-3268. https://doi.org/10.1093/rfs/hhv044
  • Eryar Ünlü, D. (2022). İyi Olan Kazansın! Sürdürülebilirliğin 5N 1K'sı. Sia Kitap, 2022.
  • European Commission. (2011). A renewed EU strategy 2011-14 for corporate social responsibility (COM(2011) 681 final). https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52011DC0681
  • Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
  • Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of financial economics, 116(1), 1-22. https://doi.org/10.1016/j.jfineco.2014.10.010
  • Fu, J. (2024). ESG, Stock Returns and Stock Volatility: Evidence from Chinese Listed Companies. In SHS Web of Conferences (Vol. 181, p. 02002). EDP Sciences. https://doi.org/10.1051/shsconf/202418102002
  • Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 32(12), 2646-2654. https://doi.org/10.1016/j.jbankfin.2008.06.002
  • Gates, B. (2021). How to avoid a climate disaster: the solutions we have and the breakthroughs we need. Vintage.
  • Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 101889. https://doi.org/10.1016/j.jcorpfin.2021.101889
  • Global Sustainable Investment Alliance. (2022). Global sustainable investment review 2022. Global Sustainable Investment Alliance. https://www.gsi-alliance.org/wp-content/uploads/2022/04/GSIR-2022.pdf
  • Global Carbon Project. (2023). Global Carbon Budget 2023. Retrieved November 16, 2024, from https://www.globalcarbonproject.org/
  • Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. The quarterly journal of economics, 118(1), 107-156. https://doi.org/10.1162/00335530360535162
  • Halbritter, G., & Dorfleitner, G. (2015). The wages of social responsibility—where are they? A critical review of ESG investing. Review of Financial Economics, 26, 25-35. https://doi.org/10.1016/j.rfe.2015.03.004
  • Humphrey, J. E., & Tan, D. T. (2014). Does it really hurt to be responsible? Journal of business ethics, 122(3), 375-386. https://doi.org/10.1007/s10551-013-1741-z
  • International Energy Agency. (2023). CO2 emissions in 2023. Retrieved from https://www.iea.org/reports/co2-emissions-in-2023.
  • International Energy Agency. (2023). Latin America Energy Outlook. Retrieved November 16, 2024, from https://www.iea.org/
  • Jensen, M. C., Black, F., & Scholes, M. S. (1972). The capital asset pricing model: Some empirical tests.
  • Kempf, A., & Osthoff, P. (2007). The effect of socially responsible investing on portfolio performance. European financial management, 13(5), 908-922. https://doi.org/10.1111/j.1468-036X.2007.00402.x
  • Limkriangkrai, M., Koh, S., & Durand, R. B. (2017). Environmental, social, and governance (ESG) profiles, stock returns, and financial policy: Australian evidence. International Review of Finance, 17(3), 461-471. https://doi.org/10.1111/irfi.12101
  • Lintner, J. (1965). Security prices, risk, and maximal gains from diversification. The journal of finance, 20(4), 587-615. https://doi.org/10.2307/2977249
  • Lundin, F., & Olandersson, M. (2019). Sustainability and Profitability in Sweden : A Quantitative Study of Swedish Firms [Dissertation]. Retrieved from https://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-160392
  • Malik, M. (2015). Value-enhancing capabilities of CSR: A brief review of contemporary literature. Journal of Business Ethics, 127(2), 419-438. https://doi.org/10.1007/s10551-014-2051-9
  • Managi, S., Okimoto, T., & Matsuda, A. (2012). Do socially responsible investment indexes outperform conventional indexes? Applied Financial Economics, 22(18), 1511-1527. https://doi.org/10.1080/09603107.2012.665593
  • Mǎnescu, C. (2011). Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk? Sustainable development, 19(2), 95-118. https://doi.org/10.1002/sd.510
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974
  • Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica: Journal of the econometric society, 768-783. https://doi.org/10.2307/1910098
  • Sahut, J. M., & Pasquini-Descomps, H. (2015). ESG impact on market performance of firms: International Evidence. Management International/International Management/Gestiòn Internacional, 19(2), 40-63. https://doi.org/10.7202/1030386ar
  • Schoenmaker, D., & Schramade, W. (2018). Principles of sustainable finance. Oxford University Press.
  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
  • Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65(4), 33-46. https://doi.org/10.2469/faj.v65.n4.5
  • United Nations (1972). Stockholm Declaration and Action Plan for the Human Environment. Stockholm, Sweden: United Nations. https://www.un.org/en/conferences/environment/stockholm1972.
  • United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. Retrieved from https://sustainabledevelopment.un.org/post2015/transformingourworld.
  • WCED, S. W. S. (1987). World commission on environment and development. Our common future, 17(1), 1-91.
  • Zehir, E., & Aybars, A. (2020). Is there any effect of ESG scores on portfolio performance? Evidence from Europe and Turkey. Journal of Capital Markets Studies, 4(2), 129-143. https://doi.org/10.1108/JCMS-09-2020-0034

ESG Skorlarının Portföy Performansı Üzerindeki Etkisi: Gelişmekte Olan (E-7) Ülkelerden Bulgular

Year 2025, Issue: 123, 35 - 63, 01.04.2025

Oğuz Şimşek , Serkan Çankaya

Abstract

Bu çalışma E-7 ülkelerinde sürdürülebilirlik ölçütü olan ESG (Environmental, Social and Governance) skorlarının varlık fiyatlama modellerine entegrasyonunu hedeflemektedir. Bu amaçla sürdürülebilirliğin portföy performansı üzerinde etkisi olup olmadığını anlamak için verisine ulaşılabilen tüm firmalar çalışmaya dahil edilmiştir. Firmalara ait ESG skorları ile oluşturulan yeni faktör, Fama & French (2015) tarafından yayınlanan 5 faktör metodolojisi baz alınarak entegre edilmeye çalışılmıştır. Sonuçlarımız ESG skorlarının getirileri açıklamada pozitif ve negatif yönlü etkileri olsa da bu etkinin Türkiye haricindeki diğer E-7 ülkelerinde istatistiksel olarak anlamlı olmadığını göstermektedir

Keywords

Sürdürülebilir Finans ESG Varlık Fiyatlama Modelleri

References

  • Afrooz, Z., & Kruusman, A. (2019). The Effect of the ESG Score on Stock Price Jumps: A Quantitative Study on Nordic Countries [Master’s thesis]. Lund University. https://www.diva-portal.org/smash/record.jsf?dswid=4981&pid=diva2%3A1325390
  • Auer, B. R., & Schuhmacher, F. (2016). Do socially (ir) responsible investments pay? New evidence from international ESG data. The Quarterly Review of Economics and Finance, 59, 51-62. https://doi.org/10.1016/j.qref.2015.07.002
  • Balatbat, M., Siew, R., & Carmichael, D. (2012). ESG scores and its influence on firm performance: Australian evidence. In Australian School of Business School of Accounting, School of Accounting Seminar Series Semester. Vol 2, 1-30. Australia: University of New South Wales, India.
  • Baptista, O. C. A. (2019). The Impact of Esg Criteria on Portfolio Financial Performance (Order No. 28787929). Available from ProQuest Dissertations & Theses Global. (2592265182). https://www.proquest.com/dissertations-theses/impact-esg-criteria-on-portfolio-financial/docview/2592265182/se-2.
  • Boido, C., Ceccherini, P., & D'Imperio, A. (2022). ESG Scores-Is it the new way to build a European portfolio? Journal of Finance and Investment Analysis, 11(3), 1-21 https://doi.org/10.47260/jfia/1131.
  • Breedt, A., Ciliberti, S., Gualdi, S., & Seager, P. (2019). Is ESG an Equity Factor or Just an Investment Guide? The Journal of Investing, 28(2), 32-42.
  • Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of finance, 52(1), 57-82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
  • Celik, S., Aktan, B., Tvaronaviciene, M. & Bengitoz, P. (2017). Linkage between company scores and stock returns. Journal of International Studies, 10(1), 219-232. doi:10.14254/2071-8330.2017/10-4/17
  • De, I., & Clayman, M. R. (2015). The benefits of socially responsible investing: An active manager’s perspective. The Journal of Investing, 24(4), 49-72.
  • Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 51-63. https://doi.org/10.2469/faj.v61.n2.2716
  • Dimson, E., Karakaş, O., & Li, X. (2015). Active ownership. The Review of Financial Studies, 28(12), 3225-3268. https://doi.org/10.1093/rfs/hhv044
  • Eryar Ünlü, D. (2022). İyi Olan Kazansın! Sürdürülebilirliğin 5N 1K'sı. Sia Kitap, 2022.
  • European Commission. (2011). A renewed EU strategy 2011-14 for corporate social responsibility (COM(2011) 681 final). https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52011DC0681
  • Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
  • Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of financial economics, 116(1), 1-22. https://doi.org/10.1016/j.jfineco.2014.10.010
  • Fu, J. (2024). ESG, Stock Returns and Stock Volatility: Evidence from Chinese Listed Companies. In SHS Web of Conferences (Vol. 181, p. 02002). EDP Sciences. https://doi.org/10.1051/shsconf/202418102002
  • Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 32(12), 2646-2654. https://doi.org/10.1016/j.jbankfin.2008.06.002
  • Gates, B. (2021). How to avoid a climate disaster: the solutions we have and the breakthroughs we need. Vintage.
  • Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 101889. https://doi.org/10.1016/j.jcorpfin.2021.101889
  • Global Sustainable Investment Alliance. (2022). Global sustainable investment review 2022. Global Sustainable Investment Alliance. https://www.gsi-alliance.org/wp-content/uploads/2022/04/GSIR-2022.pdf
  • Global Carbon Project. (2023). Global Carbon Budget 2023. Retrieved November 16, 2024, from https://www.globalcarbonproject.org/
  • Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. The quarterly journal of economics, 118(1), 107-156. https://doi.org/10.1162/00335530360535162
  • Halbritter, G., & Dorfleitner, G. (2015). The wages of social responsibility—where are they? A critical review of ESG investing. Review of Financial Economics, 26, 25-35. https://doi.org/10.1016/j.rfe.2015.03.004
  • Humphrey, J. E., & Tan, D. T. (2014). Does it really hurt to be responsible? Journal of business ethics, 122(3), 375-386. https://doi.org/10.1007/s10551-013-1741-z
  • International Energy Agency. (2023). CO2 emissions in 2023. Retrieved from https://www.iea.org/reports/co2-emissions-in-2023.
  • International Energy Agency. (2023). Latin America Energy Outlook. Retrieved November 16, 2024, from https://www.iea.org/
  • Jensen, M. C., Black, F., & Scholes, M. S. (1972). The capital asset pricing model: Some empirical tests.
  • Kempf, A., & Osthoff, P. (2007). The effect of socially responsible investing on portfolio performance. European financial management, 13(5), 908-922. https://doi.org/10.1111/j.1468-036X.2007.00402.x
  • Limkriangkrai, M., Koh, S., & Durand, R. B. (2017). Environmental, social, and governance (ESG) profiles, stock returns, and financial policy: Australian evidence. International Review of Finance, 17(3), 461-471. https://doi.org/10.1111/irfi.12101
  • Lintner, J. (1965). Security prices, risk, and maximal gains from diversification. The journal of finance, 20(4), 587-615. https://doi.org/10.2307/2977249
  • Lundin, F., & Olandersson, M. (2019). Sustainability and Profitability in Sweden : A Quantitative Study of Swedish Firms [Dissertation]. Retrieved from https://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-160392
  • Malik, M. (2015). Value-enhancing capabilities of CSR: A brief review of contemporary literature. Journal of Business Ethics, 127(2), 419-438. https://doi.org/10.1007/s10551-014-2051-9
  • Managi, S., Okimoto, T., & Matsuda, A. (2012). Do socially responsible investment indexes outperform conventional indexes? Applied Financial Economics, 22(18), 1511-1527. https://doi.org/10.1080/09603107.2012.665593
  • Mǎnescu, C. (2011). Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk? Sustainable development, 19(2), 95-118. https://doi.org/10.1002/sd.510
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974
  • Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica: Journal of the econometric society, 768-783. https://doi.org/10.2307/1910098
  • Sahut, J. M., & Pasquini-Descomps, H. (2015). ESG impact on market performance of firms: International Evidence. Management International/International Management/Gestiòn Internacional, 19(2), 40-63. https://doi.org/10.7202/1030386ar
  • Schoenmaker, D., & Schramade, W. (2018). Principles of sustainable finance. Oxford University Press.
  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
  • Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65(4), 33-46. https://doi.org/10.2469/faj.v65.n4.5
  • United Nations (1972). Stockholm Declaration and Action Plan for the Human Environment. Stockholm, Sweden: United Nations. https://www.un.org/en/conferences/environment/stockholm1972.
  • United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. Retrieved from https://sustainabledevelopment.un.org/post2015/transformingourworld.
  • WCED, S. W. S. (1987). World commission on environment and development. Our common future, 17(1), 1-91.
  • Zehir, E., & Aybars, A. (2020). Is there any effect of ESG scores on portfolio performance? Evidence from Europe and Turkey. Journal of Capital Markets Studies, 4(2), 129-143. https://doi.org/10.1108/JCMS-09-2020-0034
There are 44 citations in total.

Details

Primary Language English
Subjects Finance, Investment and Portfolio Management
Journal Section Articles
Authors

Oğuz Şimşek 0000-0001-7380-4454

Serkan Çankaya 0000-0003-3010-0697

Early Pub Date March 29, 2025
Publication Date April 1, 2025
Submission Date December 5, 2024
Acceptance Date January 17, 2025
Published in Issue Year 2025 Issue: 123

Cite

APA Şimşek, O., & Çankaya, S. (2025). Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries. Maliye Ve Finans Yazıları(123), 35-63. https://doi.org/10.33203/mfy.1596994
AMA Şimşek O, Çankaya S. Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries. Maliye ve Finans Yazıları. April 2025;(123):35-63. doi:10.33203/mfy.1596994
Chicago Şimşek, Oğuz, and Serkan Çankaya. “Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries”. Maliye Ve Finans Yazıları, no. 123 (April 2025): 35-63. https://doi.org/10.33203/mfy.1596994.
EndNote Şimşek O, Çankaya S (April 1, 2025) Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries. Maliye ve Finans Yazıları 123 35–63.
IEEE O. Şimşek and S. Çankaya, “Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries”, Maliye ve Finans Yazıları, no. 123, pp. 35–63, April 2025, doi: 10.33203/mfy.1596994.
ISNAD Şimşek, Oğuz - Çankaya, Serkan. “Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries”. Maliye ve Finans Yazıları 123 (April 2025), 35-63. https://doi.org/10.33203/mfy.1596994.
JAMA Şimşek O, Çankaya S. Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries. Maliye ve Finans Yazıları. 2025;:35–63.
MLA Şimşek, Oğuz and Serkan Çankaya. “Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries”. Maliye Ve Finans Yazıları, no. 123, 2025, pp. 35-63, doi:10.33203/mfy.1596994.
Vancouver Şimşek O, Çankaya S. Effect of ESG Scores on Portfolio Performance: Evidence from Developing (E-7) Countries. Maliye ve Finans Yazıları. 2025(123):35-63.
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