ESG Risk and Return

There are two primary factors that affect expected returns for companies with high ESG ratings – investor preferences and risk. Although investor preferences for highly rated ESG companies can lower the cost of capital, the flip side of the coin is lower expected returns for investors. Regarding risk, the jury remains out on whether there is an ESG related risk factor. However, to the extent ESG is a risk factor it also points toward lower expected returns for investments in highly rated companies. While ESG investing may have social benefits, higher expected returns for investors is not among them.