Do Green Stocks Get You the Green? Differential Impacts of S&P 500 ESG Index Labels on Firm Stock Prices
by Heera Rajavel
Abstract
On January 28, 2019, the S&P Dow Jones Indices launched the ESG S&P 500 Index, aiming to create a sustainable index fund with a similar risk/return profile to the S&P 500 Index. This study assesses the causal mechanisms behind the performance of the S&P 500 ESG Index by running two difference-in-differences estimations using a panel data set of 698 companies. The first difference-in-differences estimation compares the stock prices of companies on the S&P 500 ESG Index to the stock prices of companies S&P 500 Index, determining if companies on the S&P 500 ESG Index received an “ESG label” price premium. Results show that in the short-term and the long-term, companies on the S&P ESG 500 Index experienced statistically significant negative stock price growth relative to companies only on the general S&P 500 Index; the “ESG label” appears to slow stock growth for companies on the S&P 500 ESG Index by $48.24 in the short-term and $65.29 in the long-term. The second difference-in-differences estimation compares the stock prices of companies on the S&P 500 ESG Index to the stock prices of companies with similar ESG qualifications that are not on an S&P Index, determining if companies in the S&P 500 ESG Index received an “S&P label” price premium. These results found that in both the short and the long run, companies on the S&P 500 ESG Index faced statistically significant positive stock price growth relative to companies with similar ESG qualifications; the “S&P label” seems to increase stock price growth for companies on the S&P 500 ESG Index by $2.19 in the short-term and $7.63 in the long term.
Professor Lawrence Kreicher, Faculty Advisor
Professor Michelle Connolly, Faculty Advisor
JEL Codes: G2, G23, Q56
Shades of Green: An Examination Into Second Party ESG Ratings In The Municipal Green Bond Market
by Harrison Zane Cole
Abstract
Since the end of the pandemic the market capitalization of green bonds and investor interest in sustainable investments has grown massively. The tidal wave of ESG funds has accompanied many claims of greenwashing and extreme variation in investment quality. While many investors focus on doing their own due diligence, second party ratings are an important source of information for capturing overall risk and characteristics of a security. This paper aims to take a deeper look at how HIP Investor’s (a popular ESG rating firm) ratings correlate to real-world yield and bond characteristics. Yield refers to the annualized return that investors receive from a bond, and lower yields at issuance reduce borrowing costs for the issuer. It is generally established in popular and academic literature that green bond designation does not directly lead to a benefit for issuers in terms of their cost of capital expressed through interest rates. This paper examines the yield at issuance effects for degrees of “actual greenness” and other inputs that may lead to a security to fit well in an ESG focused or impact fund. Within a sample of green bonds, the estimated yield to worst spread premium for a best-in-class (environmentally) ESG issuer is -23.9 basis points compared to a worst-in-class issuer holding all else equal. When considering non-environmental factors such as human health, the effect is larger at -71.4 basis points. For social wealth considerations, the directionality is reversed at 17.9 basis points. More research is needed to better understand and apply these results. This decrease in interest rates can result in millions of dollars of savings for larger issuances.
Professor Lawrence Kreicher, Faculty Advisor
Professor Michelle Connolly, Faculty Advisor
JEL Codes: G1, G12, G14
