A comparative analysis of ESG and non-ESG securities : a market model perspective

This paper draws inspiration from contemporary research that highlights the increasing significance of ESG (Environmental, Social, and Governance) stocks in market performance. It specifically aims to empirically analyze differences between market model parameter estimates for ESG and non-ESG securities, with a focus on the stability of beta estimates under varying market conditions as well as on possible differences between so-called upside and downside betas. Very simply put, to the extent that in practice market model beta estimates from both simple and extended variants of the model are used to assess systematic risk, the central question asks whether beta estimates of ESG stocks significantly different from non-ESG stocks.Utilizing comprehensive datasets from NASDAQ and NYSE and using the S&P 500 as the market benchmark along with the 90-day Treasury bill as the risk-free rate, we analyze weekly price returns from 2010 through the first two weeks of 2024. This analysis employs the market model to investigate how market trends affect the returns of ESG versus non-ESG stocks. Random coefficient models are estimates considering the parameter vector as a realization of a stochastic process to explore possible random effects. Finally, both upside and downside betas are estimated and compared for the two categories of equities. The goal is to provide deeper insights into the relative stability of beta estimates, thereby contributing to the ongoing discussion about the financial viability and impact of ESG-focused investments.