ESG scores and stock returns: evidence from the french equity market

Abstract

This paper examines the relationship between Environmental, Social, and Governance (ESG) performance and stock returns in the French equity market. Using ESG scores from Refinitiv, portfolios are developed based on both aggregate ESG ratings and individual pillar scores (Environmental, Social, and Governance). A long-short portfolio strategy is implemented, and performance is assessed through multifactor asset pricing models, including the Fama-French three-factor, Carhart four-factor, and Fama-French five-factor models over the period 2017–2023. The results indicate that firms with lower overall ESG scores tend to outperform those with higher scores, particularly in value-weighted portfolios. This effect is driven by statistically significant positive alphas in low-ESG portfolios, while high-ESG portfolios do not exhibit abnormal returns. The High–Low spread is negative and significant, supporting the hypothesis that higher ESG performance is not associated with superior stock returns in this context. At the pillar level, Governance emerges as the primary driver of this effect, with low-governance firms generating higher abnormal returns, whereas Environmental and Social dimensions show no significant return differentials. Overall, the findings suggest that traditional risk factors do not fully capture ESG performance and may reflect market perceptions of ESG as a cost rather than a value-enhancing investment, particularly in the French market.