ESG Preferences, Risk and Return

There are two primary factors that can affect expected returns for ESG companies with high ratings – investor preferences and risk. While it is true that investor preferences for highly rated ESG companies can lower the cost of capital and, thereby, increase the value of those companies, the flip side of the coin is lower expected returns for investors. With respect to risk, the jury remains out on whether there is an ESG related risk factor. However, early research indicates that if there is an ESG related risk factor, it also points toward lower expected returns for investments in highly rated ESG companies because those companies provide a hedge against ESG related risk. The conclusion is that while ESG investing may have social benefits, higher expected returns for investors is not among them.