Sustainable Development Goals
Abstract/Objectives
This paper examines the role of corporate ESG (Environmental, Social, and Governance) quality on the stock returns. In theory, Pástor, Stambaugh, and Taylor (2022) argue that green stocks would have lower expected returns given that investors may require lower premiums (investor green preference) and consumers’ higher demands may increase future cash flows, both of which lead to higher stock at the present time, and thus lower expected returns. On the other hand, in terms of realized returns, Pástor et al. (2022) document a higher realized return on green stocks compared to brown stocks in U.S. stock market and it is the climate change concerns that drives the higher realized returns by holding green stocks. In this study, I examine the Taiwanese stock market and focus on ESG, rather than just E. I collect Sustainalytics ESG rating for Taiwanese firms. My sample period is from January 2022 to February 2023. My findings show that Good_ESG minus Bad_ESG stock portfolio experienced negative realized returns, though not statistically significant, implying that Good_ESG stocks do not outperform Bad_ESG stocks in Taiwanese stock market in my sample period. In addition, I find that Good_ESG minus Bad_ESG stock portfolio had lower expected returns, which is consistent with the theory in Pástor et al. (2020) that investors would require lower returns because of the enhanced preference on Good_ESG stocks.
Results/Contributions

This thesis explores the impact of ESG ratings on stock price performance in the Taiwanese stock market, using Sustainalytics ESG ratings of companies from January 2022 to February 2023. The study hypothesizes that companies with better ESG performance would have superior stock returns. However, the findings indicate that portfolios of stocks with good ESG ratings did not statistically outperform those with poor ESG ratings within the sample period. Additionally, the expected returns for portfolios favoring companies with better ESG scores were lower, aligning with theoretical predictions suggesting that such stocks should attract lower risk premiums due to their perceived stability and lower risk.

The thesis contributes to understanding how ESG factors influence stock returns in Taiwan. It challenges the assumption that higher ESG ratings automatically lead to better financial performance, suggesting that investor preferences for ESG might be reflected more in risk assessment than in realized gains. This insight is vital for investors and policymakers aiming to align financial strategies with sustainability goals.

Keywords
ESGTaiwanese Stock MarketStock Return
References