Market Risk Premium and ESG Risk

Daewoung Choi; Yong Kyu Gam; Yong Hyuck Kim; Dmitriy Muravyev; Hojong Shin

doi:10.2139/ssrn.4762314

Market Risk Premium and ESG Risk

Daewoung Choi, Yong Kyu Gam, Yong Hyuck Kim, Dmitriy Muravyev, Hojong Shin

Research output: Working paper

Abstract

We study the impact of market-wide environmental, social, and governance (ESG) risk on the equity risk premium. We construct an aggregate ESG risk index, consolidating firm-level ESG risk scores from 2010 to 2022. Using the index, we identify days with large increases in aggregate ESG risk (“ESG days”), about 14 days per year. We find a strong positive correlation between the stock market beta and average returns on ESG days. Specifically, the market risk premium is 0.315% on ESG days, in stark contrast to the -0.014% premium on non-ESG days. These findings are consistent across model specifications and test portfolios. The results suggest that ESG risk is systematic and priced.

Original language	English (US)
Number of pages	30
DOIs	https://doi.org/10.2139/ssrn.4762314
State	Published - Apr 12 2024
Externally published	Yes

Keywords

ESG
Market Risk Premium

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10.2139/ssrn.4762314

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abstract = "We study the impact of market-wide environmental, social, and governance (ESG) risk on the equity risk premium. We construct an aggregate ESG risk index, consolidating firm-level ESG risk scores from 2010 to 2022. Using the index, we identify days with large increases in aggregate ESG risk (“ESG days”), about 14 days per year. We find a strong positive correlation between the stock market beta and average returns on ESG days. Specifically, the market risk premium is 0.315% on ESG days, in stark contrast to the -0.014% premium on non-ESG days. These findings are consistent across model specifications and test portfolios. The results suggest that ESG risk is systematic and priced. ",

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AU - Muravyev, Dmitriy

AU - Shin, Hojong

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AB - We study the impact of market-wide environmental, social, and governance (ESG) risk on the equity risk premium. We construct an aggregate ESG risk index, consolidating firm-level ESG risk scores from 2010 to 2022. Using the index, we identify days with large increases in aggregate ESG risk (“ESG days”), about 14 days per year. We find a strong positive correlation between the stock market beta and average returns on ESG days. Specifically, the market risk premium is 0.315% on ESG days, in stark contrast to the -0.014% premium on non-ESG days. These findings are consistent across model specifications and test portfolios. The results suggest that ESG risk is systematic and priced.

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M3 - Working paper

BT - Market Risk Premium and ESG Risk

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Market Risk Premium and ESG Risk

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