Esg Factors Effect

Exploring the Relationship
Between ESG and Portfolio

Performance During Times of
Crisis
A Study of the Russia-Ukraine War
by Saraj Huq, Erika Jutila and Oscar Sameland
Stockholm Business School

Bachelor’s Degree Thesis 15 HE Credits
Subject: Business Administration
Fall semester 2022
Supervisor: Ran Xing
Acknowledgements
We would like to extend our appreciation to our opponents for their valuable contributions
and insights. Their critiques and feedback have helped us to refine our research and strengthen
our arguments.
Additionally, we would like to express our sincerest thanks to our supervisor, Ran Xing, for
their guidance and mentorship throughout this journey. Their expertise and direction have
been instrumental in helping us to develop a clear framework for our study and we are truly
grateful for their invaluable support.
Abstract
This thesis explores the relationship between Environmental, Social, and Governance (ESG)
ratings and portfolio performance in terms of risk-adjusted returns and volatility during times
of crisis. A sample of 761 European public companies with a market capitalisation of at least
300 million euros are divided into high and low ESG portfolios based on their ratings. The
high ESG portfolio consists of companies with ratings in the top 20% (fifth quintile) and the
low ESG portfolio consists of companies with ratings in the bottom 20% (first quintile). Both
portfolios are rebalanced annually throughout the study period. The study finds that both
portfolios, especially the low ESG portfolio, outperform the market, in terms of excess returns
as well as risk-adjusted returns during the Russia-Ukraine war. Additionally, the study finds
that the low ESG portfolio has the lowest risk during the war period. However, the results
lack statistical significance. To ensure the robustness of the results, a separate test is
conducted studying the COVID-19 instead of the Russia-Ukraine War. The robustness test
reveals that both portfolios generated abnormal risk-adjusted returns during the COVID-19
period, in contrast with the original study’s findings. However, the explanatory power of the
models is limited.
Table of Contents
1. Introduction ............................................................................ 1
1.1 Background ...........................................................................................1
1.2 Problem Description ................................................................................3
1.3 Aim and Contribution ..............................................................................4
1.4 Results .................................................................................................5
1.5 Limitations ............................................................................................5
1.6 Outline .................................................................................................6
2. Literature Review .................................................................... 8
2.1 Introduction ..........................................................................................8
2.2 Theoretical Framework ............................................................................9
2.2.1 Modern Portfolio Theory (MPT) ............................................................9
2.2.2 Efficient Market Hypothesis (EMH) ..................................................... 10
2.2.3 Capital Asset Pricing Model (CAPM) .................................................... 11
2.2.4 Fama-French Three-Factor Model (FF3FM) ........................................... 11
2.2.5 Jensen’s Alpha ............................................................................... 12
2.2.6 Sharpe Ratio .................................................................................. 13
2.2.7 Volatility ....................................................................................... 14
2.3 Literature Survey.................................................................................. 15
2.3.1 CSR and ESG ................................................................................. 15
2.3.2 Correlation Between ESG and Portfolio Returns .................................... 16
2.4 Conclusion........................................................................................... 20
3. Research Design .................................................................... 22
3.1 Problem, Purpose, and Contribution ......................................................... 22
3.2 Scientific Perspective............................................................................. 23
3.3 Method ............................................................................................... 24
3.3.1 Data Collection ............................................................................... 24
3.3.2 Description of Variables ................................................................... 27
3.3.3 Portfolio Formation.......................................................................... 31
3.3.4 Empirical Models ............................................................................. 32
3.4 Reliability and Validity ........................................................................... 35
3.5 Source Critical Considerations ................................................................. 36
3.6 Research Ethical Reflections ................................................................... 36
4. Analysis and Findings ............................................................ 37
4.1 Descriptive Statistics ............................................................................. 37
4.1.1 Excess Return Index........................................................................ 42
4.1.2 Multicollinearity .............................................................................. 43
4.2 Empirical Results .................................................................................. 47
4.2.1 CAPM and FF3FM Regression Results .................................................. 48
4.2.2 Robustness Test ............................................................................. 53
4.2.3 Portfolio Risk and Sharpe Ratio Results ............................................... 57
4.3 Hypothesis Testing................................................................................ 59
5. Discussion and Critical Reflection ......................................... 61
5.1 Portfolio Returns................................................................................... 61
5.2 Portfolio Volatility ................................................................................. 62
5.3 Possible Explanations of the Results ......................................................... 62
5.4 Critical Reflection.................................................................................. 63
6. Conclusion ............................................................................. 65
6.1 Future Research ................................................................................... 66
7. Limitation of Research .......................................................... 68
References .................................................................................... 70
Appendices .................................................................................... 75
1. Introduction
1.1 Background
On February 24, 2022, Russia initiated a full-scale invasion of Ukraine, after recognising the
Donbass and Luhansk regions as independent states two days earlier. In 2014, Russia-Ukraine
relations began to deteriorate and triggered an immediate response from Western
governments. European countries, along with Canada and the USA, imposed a package of
sanctions against Russia. These included the removal of several banks from the SWIFT
system and the freezing of the Russian Central Bank’s assets. The sanctions were aimed at
cutting off the Russian economy from most of its export markets, while major multinational
corporations announced their exit from Russia. Globally, it became apparent that the ongoing
war would have a significant impact on companies (Boungou and Yatié, 2022).
Following the news that Russian troops had entered Ukraine, stock markets fell sharply. The
European Market Index dropped 3% in one day. Moscow's MOEX Exchange fell by a record
33%, leading to the longest closure of the exchange since 1998. According to Susannah
Streeter, senior investment analyst at Hargreaves Lansdown: “Market volatility has increased
since the beginning of the year, stoked by rising interest rates, and today’s news has added
fuel to the market turbulence” (Kenneth R. French, 2022; Goncalves 2022; Elbahrawy, 2022).
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Figure 1: European Market Index.
Figure 1 illustrates value-weighted market performance in Europe between January 2015 and October
2022 and has been obtained from the Kenneth R. French Data Library (source: own contribution).
In times of crisis, empirical and theoretical evidence indicates that investors tend to move to
stocks that are less risky in order to reduce their losses. Specifically, previous literature has
identified high-rated ESG stocks as an area that satisfies this criterion and can thus serve as a
"safe haven" (e.g., Albuquerque et al., 2020; Lins, Servaes and Tamayo 2017). In this
category, stocks are rated based on their environmental, social, and governance activities. A
variety of data providers provide these scores due to the increased demand for the
incorporation of ESG factors into investment decisions.
Sandberg and Nilsson (2015) define ESG investing as: "...considerations concerning ethics,
social issues, and the environment should be incorporated into financial investment
decisions." As well as benefiting shareholders, ESG initiatives are argued to be beneficial to
society at large (McClimon, 2020). Theoretically, this is consistent with Freeman's (1984)
stakeholder theory, which states that a company's focus on community, employee safety, et
cetera, will contribute to its competitive advantage. Furthermore, ESG initiatives are proposed
to mitigate risk by offering insurance-like protection against downside risks (e.g., Elkington,
1997; Godfrey, Hansen and Merrill, 2009; Clark, Feiner and Viehs, 2014). Several researchers
confirm this hypothesis, showing that high-rated ESG stocks have lower levels of risk than
low-rated ESG stocks and produce better performance during crisis times (Nofsinger and
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Varma, 2014; Albuquerque et al., 2020; Lins, Servaes and Tamayo, 2017). The Russia-
Ukraine war presents a unique opportunity to test whether high-rated ESG stocks can remain
resilient to crises.
Boungou and Yatié (2022) conducted the first empirical study on the war. They find a
negative correlation between global stock returns and the Russia-Ukraine war. The results
also indicate that the stock markets of countries geographically close to Russia and Ukraine
are the most impacted by the war.
Due to this recent outbreak of a war and the following global market crisis, particularly in
light of Europe’s proximity to Russia and Ukraine, it is relevant to examine European firms’
stock performance based on sustainability values (i.e., high versus low ESG ratings).
Therefore, the thesis investigates if European firms with a strategy of sustainable investing
could lead to a superior risk adjusted return during a recent crisis: the Russia-Ukraine war.
This is done by constructing portfolios that are based on high respectively low ESG scores
and a timeline before and during the Russia-Ukraine war, to compare them to the European
markets’ overall performance.
1.2 Problem Description
While the topic of ESG and stock performance is not new and has been studied in relation to
other crises, research on this specific crisis is absent. This is to the best of our knowledge.
The purpose of this study is to examine the relationship between ESG ratings and portfolio
performance during the Russia-Ukraine war. Previous studies on ESG and stock performance
during crises yield inconsistent results. Albuquerque et al. (2020) conclude that portfolios
consisting of stocks with high ESG ratings performed better during the COVID-19 crisis on
the U.S. market, while Lins, Servaes and Tamayo (2017) find that such portfolios
outperformed portfolios with low-rated ESG stocks during the Great Recession. Oberndorfer
et al. (2013) find a negative correlation between portfolio performance and ESG engagement
on the European market. Given these conflicting results and the impact of the Russia-Ukraine
war on stock markets in neighbouring countries (Boungou and Yatié, 2022), it is important to
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further investigate the relationship between ESG ratings and portfolio performance during
crises.
With reference to this, we investigate the relationship between the ESG ratings of European
companies and their portfolio performance during periods of crisis, specifically the Russian-
Ukrainian war. The research question is:
• Do ESG ratings of European companies have an impact on abnormal risk-adjusted

returns during times of crisis?
A sub-question that arises from the main question is about the risk of investing in ESG-rated
portfolios during crises. Given that investors hold significant positions in the market, it is
important to also consider the potential risks associated with investing in these types of
portfolios during times of uncertainty. Studies such as Albuquerque et al. (2020) find that
ESG portfolios are resilient and less volatile during crises, while a more recent study by
Bougias, Episcopos and Leledakis (2022) find that the Russia-Ukraine war leads to higher
asset volatility for companies in the region, making it particularly relevant to study risk during
this specific crisis. Hence the sub-question:
o Do ESG ratings of European companies have an impact on volatility

during times of crisis?
To answer the main question, the study utilises well-known risk-adjusted measures such as
Jensen's alpha and the Sharpe ratio. To answer the second question, historical volatility is
used as a proxy to measure portfolio risk. Data is collected from 60 months before the crisis,
using a method similar to that described by Bae et al. (2020) in their study of the U.S. market.
1.3 Aim and Contribution
The aim of this study is to examine whether European public companies with either high or
low ESG ratings generate abnormal risk-adjusted returns during crisis periods. This thesis
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contributes to previous research by examining the latest crisis period, the Russia-Ukraine
War, from February 2022 to October 2022. A robustness test is conducted to test if the results
are reproducible during another crisis period, COVID-19, from January 2020 to December
2021.
In an increasingly globalized world, events happening in one country can have a ripple effect
on other countries around the world. It is especially true for adverse macroeconomic events,
such as recessions, financial crises, or political instability, which can have a negative effect on
stock markets. Therefore, it is important for investors, portfolio managers and policymakers to
be aware of both the risks and opportunities related to investing during crisis periods.
The main reason for conducting this analysis is to gain insight into how the current conflict is
affecting the financial performance of portfolios. This research aims to fill an existing gap in
knowledge by investigating the performance and risk of ESG-rated portfolios during the
Russia-Ukraine war. The findings of this study contribute to the ongoing debate about the
potential benefits of incorporating ESG factors into investment decisions, specifically in terms
of financial performance and risk during crisis periods.
1.4 Results
The study finds that both high and low ESG portfolios outperform the market in terms of
excess returns and risk-adjusted returns. However, the results, when applying the capital asset
pricing and the Fama-French three-factor model, are not statistically significant. A robustness
test fails to validate these results. Furthermore, the study shows that during war, the low ESG
portfolio has the lowest risk. The beta coefficients of the portfolios indicate that the risk is
mainly idiosyncratic, but the results lack statistical significance.
1.5 Limitations
The main limitations of this study are briefly discussed below:
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Many papers on ESG have relatively short sample periods, typically less than ten years, which
can lead to low statistical power in asset pricing tests and sensitivity to events occurring
within the analysed time frame (Hvidkjær, 2017). Due to the unavailability of Refinitiv Eikon
ESG scores, and the fact that the war is still ongoing, this study is limited to an eight-year
period from January 2015 to October 2022. A longer time horizon would provide more robust
results on the effectiveness of the investment strategy being examined.
It should be noted that the results of this study, as with any study based on ESG scores, can
only be compared to and applied to other studies that use the same data provider. According
to research, there is an "evident lack of convergence of ESG measurement concepts" and the
scores from different rating agencies fail to match either in risk or distribution (Dorfleitner,
Halbritter and Nguyen, 2015). Therefore, it can be concluded that only Refinitiv Eikon ESG
scores can accurately assess the effectiveness of the investment strategy analysed in this
study.
We retrieve all stocks with a market capitalization larger than 300 million euros to collect data
from the largest companies in Europe. This study is limited to the European market. Thus, the
results cannot be generalized to other markets.
The portfolios are rebalanced annually. However, the impact of transaction costs (fees
associated with buying and selling securities or assets) on portfolio performance is not
considered in this study. This can affect the profits of portfolios.
1.6 Outline
The thesis is structured as follows:
Chapter 2 reviews previous research on the relationship between ESG rating and portfolio
performance and risk during times of crisis.
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Chapter 3 lays out the goal and significance of the thesis, including a description of the
research perspective, data collection, and methodology used. It also discusses the concepts of
validity and reliability and addresses ethical considerations.
Chapter 4 presents a summary of the descriptive statistics and empirical results obtained from
statistical analyses, and hypothesis testing.
Chapter 5 discusses the findings from chapter 4 and provides a critical examination of the
results.
Chapter 6 concludes the thesis.
Chapter 7 identifies and examines the limitations of the study.
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2. Literature Review
In the literature review, we first present an overview of the chapter, then survey the previous
research on ESG and stock performance. Finally, we present the theoretical framework for our
study.
2.1 Introduction
The ESG rating is a measurement of how well companies are performing in terms of
environmental, social and governance responsibility. The term ESG is rather new, but during
the last decades the field of CSR (Corporate Social Responsibility) has emerged in business
management. Several studies have been conducted on CSR in relation to performance.
There is mixed evidence on the relationship between Environmental, Social, and Governance
(ESG) ratings and portfolio returns. Some studies find a positive correlation, with ESG
investments outperforming conventional investments, particularly during times of crisis
(Nofsinger and Varma, 2014; Kempf and Osthoff, 2007; Albuquerque et al., 2020; Lins,
Servaes and Tamayo, 2017). Other studies, however, find a negative correlation, with ESG
investments underperforming the market (Hong and Kacperczyk, 2009; Oberndorfer et al.,
2013). In addition to that, there are studies that do not reveal any correlation or show
ambiguous results (Buchanan, Cao and Chen, 2018; Bae et al., 2020; Aybars and Zehir,
2020).
These are the main research question and the following sub-question that are examined in the
thesis:

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2.2 Theoretical Framework
2.2.1 Modern Portfolio Theory (MPT)
The Modern Portfolio Theory (MPT) is a financial theory that explains how investors can
choose portfolios that offer the highest expected return for a given level of risk, or the lowest
risk for a given level of expected return. MPT views each security's risk and return
characteristics as part of a larger portfolio context, rather than in isolation, and aims to find
the optimal diversification of a portfolio. According to MPT, diversification is achieved by
holding securities that are not perfectly correlated with each other, which means that a given
expected portfolio return can be achieved with different levels of risk. Security-specific risk
can be diversified away, but market-wide risk, or portfolio risk, cannot be eliminated through
diversification (Markowitz, 1952).
The concept of the efficient frontier illustrates the range of portfolio choices available to
investors, with the most efficient portfolio represented by E* and * (Merton, 1972). The curve
on the graph represents the trade-off between risk and return, with R indicating the risk-free
asset. According to MPT, an investor can either select portfolios that have the same level of
risk (volatility) and choose the one with the highest expected return or select portfolios that
have the same expected return and choose the one with the lowest risk. Portfolios to the right
of the efficient frontier are not considered optimal because they do not offer the best
combination of risk and return (Markowitz, 1952).
MPT is based on the assumption that investors seek to maximize their economic returns.
However, recent research suggests that investors may also be concerned with factors such as
responsible governance, environmental considerations, and ethical business values (Peloza,
2006).
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Figure 2: The Efficient Frontier.
Figure 2 The Efficient Frontier (Merton, 1972, p. 1867).
2.2.2 Efficient Market Hypothesis (EMH)
The Efficient Market Hypothesis (EMH) states that all available information about a company
is directly reflected in the market price. If the hypothesis is true, it means that arbitrage cannot
be made by those who do not possess any additional information which is not official. The
EMH was first thoroughly studied by Eugene Fama (1970). He suggests three forms of
efficiency: the strong, the semi-strong and the weak form (Fama, 1970).
The strong form presupposes that all relevant information is available to all investors. This
means that there does not exist any inside-outside aspect and basically anyone can do a fully
informed decision based upon that. In the semi-strong form, all official information is
reflected in the price, but if you come across confidential details you are in a stronger position
than others on the market and can thus benefit from that. The weak form of the efficient
market hypothesis does only include historical data, such as historical prices (Fama, 1970).
There is practically total support among all scholars for the weak form whereas the other
forms are more questionable (Lee and Yen, 2008).
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2.2.3 Capital Asset Pricing Model (CAPM)
The capital asset pricing model (CAPM) quantifies systematic risk in an asset. The main
assumption is that higher risk yields higher returns. The model that was first presented by
Sharpe (1964) suggests a linear relationship between the risk premium and risk. This is an
effect of the model only containing one independent variable. (Sharpe, 1964) The model has
been revisited since, for instance by Fama and French who developed a three-factor model
based on CAPM (Fama and French, 1993).
𝑟𝑝 = 𝑟𝑓 + 𝛽(𝑟𝑚 − 𝑟𝑓 )
Where:
𝑟𝑝 =portfolio return
𝑟𝑓 =risk-free rate of return
𝛽=beta
𝑟𝑚 =market return
2.2.4 Fama-French Three-Factor Model (FF3FM)
As a single factor model, CAPM assumes that the return of the market portfolio can explain
the return of the expected investment. Later theories have challenged the restrictive
assumptions of this theory. One criticism of this method is that other factors besides the
market factor must be taken into account in estimating expected returns. In 1993, Eugene
Fama and Kenneth French introduced the FF3FM, which is widely adapted. They identify two
firm characteristics that, in addition to the market factor, better explain return variability. In
this analysis, factor premiums are correlated with size risk and value risk, namely SMB (small
minus big) and HML (high minus low). The definition of the FF3FM is:
𝑟𝑝 − 𝑟𝑓 = 𝛼𝑝 + 𝛽𝑝,𝑀𝐾𝑇 (𝑟𝑚 − 𝑟𝑓 ) + 𝛽𝑝,𝑆𝑀𝐵 𝑆𝑀𝐵 + 𝛽𝑝,𝐻𝑀𝐿 𝐻𝑀𝐿
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Where:
𝛼𝑝 =Jensen’s alpha
𝑆𝑀𝐵=small minus big
𝐻𝑀𝐿=high minus low
𝛽𝑝,𝑀𝐾𝑇 , 𝛽𝑝,𝑆𝑀𝐵 and 𝛽𝑝,𝐻𝑀𝐿 =coefficients of the three independent variables
The SMB factor is an attempt to incorporate a size-effect, based on empirical research,

suggesting that small stocks generally outperform large stocks. This measure of size refers to
market capitalization and is calculated as the difference between a small stock portfolio's
return and a large stock portfolio's return. Based on earlier empirical studies, the HML factor
asserts that value stocks tend to outperform growth stocks. Growth stocks have a low book-to-
market ratio, whereas value stocks have a high book-to-market ratio. The assumption is that a
portfolio of companies with a high book-to-market ratio produces an excess return over a
portfolio of companies with a low book-to-market ratio.
2.2.5 Jensen’s Alpha
According to Jensen, alpha, which he introduced in 1968, is a measure of risk-adjusted returns

that can be applied to analyse how far observed stock returns deviate from predicted ones
(hereinafter referred to as abnormal returns). Using Jensen’s alpha, it is possible to capture
potential under- or outperformance by comparing the performance of an asset to its CAPM
projection (Jensen, 1968). As the term "alpha" is used throughout this thesis, it refers to
Jensen’s alpha.
It is possible to gain a better understanding of the way alpha works by examining the Security
Market Line (SML) (Bodie, Kane and Marcus, 2013). In Figure 3, the SML illustrates the
potential return for a given level of market risk (measured by beta). A benchmark can
therefore be used to determine whether an asset has achieved abnormal returns. If alpha is
zero, it signifies that no abnormal returns have been generated, and as a result, the asset is
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priced and listed on the SML. When alpha is greater than (less than) zero, however, an
abnormal return has been achieved, and the stock is placed above (below) the SML (Bodie,
Kane and Marcus, 2013).
Figure 3: The Security Market Line.
Figure 3 illustrates the security market line (Bodie, Kane and Marcus, 2013).
2.2.6 Sharpe Ratio
The Sharpe Ratio is a measurement index commonly used to evaluate the risk-adjusted returns
of portfolios. It measures a portfolio’s excess return per unit of total risk (Sharpe 1966; 1994).
The excess return is computed by subtracting the average return of the portfolio from the
average risk-free rate, divided by volatility which is the standard deviation of the portfolio’s
excess return. The Sharpe ratio can be expressed mathematically as follows:
𝑟𝑝 − 𝑟𝑓
𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 =
𝜎𝑝
Where:
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𝜎𝑝 = standard deviation of the portfolio’s excess return
When comparing Sharpe ratios, a higher ratio means that the portfolio outperforms all others
in terms of risk-adjusted returns. A high Sharpe value could either indicate a portfolio with a
superior average return, a portfolio with lower volatility compared to others, or both.
2.2.7 Volatility
In finance there is a risk that future returns will be unpredictable. Unpredictability is measured
using the standard deviation or variance. There are two main types of risks that can affect the
performance of a portfolio: systematic risks and idiosyncratic risks. Systematic risks are risks
that affect a large number of assets or the entire market. These risks are generally not specific
to any one asset or portfolio and cannot be diversified away. Idiosyncratic risks, on the other
hand, are risks that are specific to a particular asset or portfolio. These risks can often be
reduced by including a diverse range of assets in a portfolio. The combination of these two
types of risk is known as total risk, or volatility. There are various methods for calculating
risk, and the Fama and French three-factor model is one commonly used approach
(Markowitz, 1952). The beta value calculated using this model measures the volatility, or risk,
of a portfolio. A portfolio with a beta greater than one tends to fluctuate more than the overall
market, while a portfolio with a beta of less than one is less volatile than the market. Stocks
with high betas may offer higher potential returns, but they are also considered to be riskier
investments. Low beta portfolios, on the other hand, tend to be less risky but may have lower
returns (Koundouri, Pittis and Plataniotis, 2022).
However, most investors do not own shares in just one company, but rather hold a portfolio of
shares. Idiosyncratic risk can be reduced by holding a diverse portfolio of stocks. While
stocks are highly correlated with each other, they are not perfectly correlated. This means that
the price of one stock may not always move in lockstep with the price of another stock, which
allows firm-specific risk to be reduced through diversification. In theory, an investor should
aim to diversify their portfolio until only market risks remain (Markowitz, 1952). Traditional
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theory states that the market is only priced based on systematic risks. However, recent
empirical evidence suggests that this may not be the complete picture.
According to Campbell et al. (2001), the volatility of individual firms has been increasing
compared to the volatility of the overall market in recent years. This trend may be due to the
study of individual stocks at various levels such as the market, industry, and firm. As a result,
the CAPM may not be as effective at explaining this trend.
Malkiel and Xu (2003) find that idiosyncratic risk, which is specific to a particular company
or investment, has increased over time. Their method differs from Campbell et al. (2001) as
they use the FF3FM. They also notice that, even when controlling for size effects,
idiosyncratic risk is positively related to institutional ownership. Fu (2009) uses EGARCH
models to estimate expected idiosyncratic risk and receive a positive relationship between
idiosyncratic risk and expected returns.
2.3 Literature Survey
2.3.1 CSR and ESG
Corporate Social Responsibility (CSR) is a framework that has been increasingly popular in
recent decades. In short, CSR emphasises a broader duty for the company than just
profitability for its shareholders. In CSR the term stakeholders is applied instead, which
includes all parts of society that are affected by the actions of the firm. Examples of
stakeholders are the government, the environment, and employees (Lindgreen and Swaen,
2010).
The terms CSR and ESG (Environmental, Social, Governance) have similar meanings but
different origins. CSR has been in use for several decades, but it was not until 2004 that ESG
was invented. The term was developed by 20 financial institutions following a demand from
the United Nations’ general secretary Kofi Annan in order to integrate more aspects than
profitability into the minds of financial actors (Kell, 2018). By definition, CSR has a more
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general approach whereas ESG explicitly states three perspectives. For instance, the aspect of
governance is just indirectly concerned by CSR, while ESG mentions it explicitly in its
abbreviation (Gillan, Koch and Starks, 2020). CSR is included in the literature review even
though only ESG will be examined in the study itself due to its long history and established
position. In this thesis we use the terms CSR and ESG interchangeably.
2.3.2 Correlation Between ESG and Portfolio Returns
In academia, there is no consensus whether ESG ratings and portfolio returns correlate, and if
so positively or negatively. The following subsections mention previous studies that find
positive, negative, and no correlation between the two or ambiguous results.
Positive Correlation
There are several papers in the academic literature that demonstrate superior performance for
ESG investments. We focus on the most notable ones in this subsection.
Bassen, Busch and Friede (2015) conduct a comprehensive study on the relationship between
ESG and corporate financial performance (CFP). Their analysis includes results from 2220
individual studies that date back to 1970 and extend to the end of 2014. Their research method
consists of two steps. They analyse findings from vote-count studies and from meta-analysis
studies. The findings from the study exhibit the following correlations between ESG and CFP:
There is a 48% positive result, followed by 23% neutral, 18% mixed and 10% negative results
(Bassen, Busch and Friede, 2015).
A study by Nofsinger and Varma (2014) find that during the Great Recession, ESG funds
outperformed conventional funds. They also observe that ESG funds may underperform
during non-crisis periods. The authors suggest that the skewness in utility described in
prospect theory may explain the willingness to accept underperformance during normal times
in exchange for outperformance during times of crisis.
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Albuquerque et al. (2020) conduct a study of the U.S. market that includes 2,171 stocks. They
use Refinitiv Eikon to collect data on ESG activities and Capital IQ for daily stock returns.
The S&P 500 acts as the market index. The study analyses the performance of stocks between
2017 and 2019, as well as during the first quarter of 2020 to examine the impact of the
COVID-19 pandemic. The results of the study show that companies with strong ESG policies
and activities outperform others. ESG stocks are more resilient and less volatile. Furthermore,
they are valued higher by customers and investors. Customers demonstrate a preference for
companies with strong ESG policies, and investors feel more secure with them, particularly
during times of adversity. Overall, the study finds that ESG stocks offer value to companies
and their investors.
Kempf and Osthoff (2007) study the returns of socially responsible investment (SRI)
portfolios using negative, positive, and best-in-class screens for the period 1992-2004. They
use KLD SRI ratings (now MSCI ESG ratings) to rank firms and construct value-weighted
portfolios, which are rebalanced annually. The high-rated portfolio consists of the top 10% of
all stocks and the low-rated portfolio of the worst 10%. They find that the use of negative
screens entails inferior performance compared to positive and best-in-class screens. Long-
short portfolios, using positive screens and a combination of positive and negative screens,
yield statistically significant excess returns of 4.46% and 4.80%, respectively. The best-in-
class approach, which focuses on the very best companies (5% cut-off rate), generates even
higher returns of up to 8.7%. The study also finds that the use of equal-weighted portfolios
instead of value-weighted ones does not change the results significantly.
To examine the effects of the Great Recession Lins, Servaes and Tamayo (2017) examine the
U.S. market from August 2008 to March 2009 with a sample of 1,673 non-financial firms.
They create an index of strengths and concerns in these five categories: community, diversity,
employee relations, environment, and human rights. Conducting a regression analysis with
their received variables, they reach the result that firms with high CSR rating scores
outperform those with low scores in financial terms. Moving one standard deviation up from
the mean CSR score means a 4.15 percentage points higher abnormal return during the crisis.
Not only is the average return considerably higher than for the others, but they do also enjoy a
higher profitability and sales. According to the authors, investments in CSR seem to pay off in
the U.S. for non-financial firms when times are uncertain (Lins, Servaes and Tamayo, 2017).
17
Even though the authors receive a clear result, their period of research is less than one year
which is rather short. One can also argue that the current crisis is very different from the Great
Recession in the speed and nature of the shock. That is why Albuquerque et al. (2020) study is
more relevant to recent crises.
Negative Correlation
The number of studies in the academic literature that demonstrate a negative correlation
between ESG investing and investment returns is much lower than the number that
demonstrate a positive correlation (Bassen, Busch and Friede, 2015).
Hong and Kacperczyk (2009) conduct a study to examine the impact of negative screening or
avoiding "sin stocks" (companies associated with alcohol, tobacco, and gambling), on
portfolio returns. The study covers a period from 1926 to 2004 and apply a long-short
portfolio strategy, investing in both sin stocks and ethical stocks. The researchers use the
CAPM, FF3FM, and Carhart multifactor model to analyse performance. The results show that
the sin stock portfolio produce a 0.45% excess return using CAPM and monthly alphas of
0.57% and 0.39% using the FF3FM and Carhart model, respectively. This indicates that the
sin stock portfolio outperforms similar stocks in the food, soda, fun, and meals sectors
according to Fama and French's (1997) industry classifications. The authors conclude that
because sin stocks carry higher risks, including the risk of litigation, investors should be
compensated for holding them. Moreover, the authors find that few sin stocks are owned by
professional investors due to social conventions. As a result of the findings of the paper,
stocks that promote vice have higher expected returns (Hong and Kacperczyk, 2009). One
could object that this study is not about ESG or CSR since those terms were not yet invented
back then. A strength of this study, though, is its long study period and the implications of
ESG and CSR are in line with its theme.
In a study carried out by Oberndorfer et al. (2013) it is found that a company’s engagement in
ESG lead to weaker financial performance. This is in part explained by higher costs for the
company to take into consideration other than financial aspects. The authors study how the
market react when German companies are included in the Dow Jones Sustainability World
18
Index and the Dow Jones STOXX Sustainability Index during a period from 1999 to 2002.
The results are obtained using a t-GARCH (1,1) model in addition to the FF3FM. Stock
returns correlate strongly negatively with inclusion in the Dow Jones STOXX Sustainability
Index while there is no statistically significant correlation with inclusion in the other index.
The authors suggest that this difference may be due to the higher visibility of the Dow Jones
STOXX Sustainability Index (Oberndorfer et al., 2013).
Ambiguous Results or No Correlation
Finally, there are also studies that suggest no significant correlation between ESG and stock
performance or where the results are ambiguous. These are three of them:
How businesses with a high CSR ranking were affected prior to and during the Great
Recession is examined by Buchanan, Cao and Chen (2018). They consult the Russell 3000
firms in the U.S. and the Bloomberg ESG index. The sample period spans from January 2006
to December 2010. Applying different regression models, among them the Fama-French five-
factor model, the authors detect a positive correlation between CSR engagement and financial
value of the company before the crisis, especially where the institutional ownership is low.
However, during the crisis these companies lose more of their value than their low-CSR
counterparts (Buchanan, Cao and Chen, 2018). Their results seem to be opposite to those of
Nofsinger and Varma. They detect a negative correlation before the Great Recession which
turned into a positive correlation during the crisis. Both studies are conducted in the United
States and around the same period. They use different samples, though, and different methods
(Buchanan, Cao and Chen, 2018; Nofsinger and Varma, 2014).
Bae et al. (2020) study the relationship between corporate social responsibility (CSR) and
stock performance in response to the COVID-19 pandemic. The study includes 1,750 U.S.
firms and uses data from MSCI ESG Stats (formerly KLD Stats) and Refinitiv Eikon for
different years. The researchers analyse two time periods: the crisis induced by COVID-19
from February 18 to March 20, 2020, and the post-crisis recovery from March 23 to June 5,
2020. The results of the study demonstrate that there is no correlation between CSR and stock
returns during either the crisis or the post-crisis recovery period. This is different from the
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findings of Albuquerque et al. (2020), where CSR is positively related to stock market
performance during the crisis. However, this study differs from Albuquerque et al. (2020) in
that it uses data from two ESG providers. Additionally, the method is similar to that of Lins,
Servaes and Tamayo (2017) except that this study examines a more recent crisis in the U.S.
market. However, the results do not support those of Lins, Servaes and Tamayo (2017).
Aybars and Zehir (2020) perform a study where the top and bottom 10 percent on the ESG
index in Europe and Turkey were compared in relation to portfolio performance. They use the
CAPM and a sample spanning from 2004 to 2018 to study each of the ESG factors
individually and the combined index. In addition to this, they create portfolios for FF3FM
testing. The ESG data and stock market data are obtained from Refinitiv Eikon. For most
portfolios the authors find insignificant correlations with performance, but one of the
exceptions is the portfolio consisting of the top 10 percent of the ESG index. In the CAPM
test this one demonstrates a significant negative correlation with performance compared to the
market. The ESG bottom portfolio does not, however, show any significant correlation.
(Aybars and Zehir, 2020). This thesis follows the same method as Kempf and Osthoff (2007)
where 10% of stocks with the highest scores are included in the “Top” portfolio and 10% of
stocks with the lowest scores are included in the "Bottom" portfolio. However, the results are
contrary to theirs.
2.4 Conclusion
As a final conclusion to the chapter, several previous studies have investigated the
relationship between ESG ratings and portfolio returns. Some of them find a positive
correlation (Nofsinger and Varma, 2014; Kempf and Osthoff, 2007; Albuquerque et al., 2020;
Lins, Servaes and Tamayo, 2017), with ESG investments outperforming conventional
investments, particularly during times of crisis. Other studies receive a negative correlation
(Hong and Kacperczyk, 2009; Oberndorfer et al., 2013), with ESG investments
underperforming the market. Finally, there are some studies not showing any correlation or
ambiguous results (Buchanan, Cao and Chen, 2018; Bae et al., 2020; Aybars and Zehir,
2020). The specific criteria used for ESG ratings, the length of the investment period, and the
industry or sector being analysed may all influence the relationship between ESG and
20
portfolio returns. It is important for investors to consider these factors when evaluating the
potential risks and rewards when investing in ESG portfolios.
21
3. Research Design
3.1 Problem, Purpose, and Contribution
The purpose of this study is twofold. Firstly, we investigate the relationship between ESG
ratings and abnormal returns for European public companies in times of crisis. Secondly, we
examine if there is a difference in volatility between high and low ESG portfolios during such
periods. To achieve this, the study will examine data from the Russia-Ukraine war between
February 2022 and October 2022 and conduct a robustness test using data from the COVID-
19 pandemic between January 2020 and December 2021. By providing insights into these
phenomena during specific crisis periods, this research aims to add to the existing, yet limited
and ambiguous, knowledge on the topic. It also assists market participants in preparing for
future crises. To the best of our knowledge, this will be the first study to analyse the
relationship between ESG ratings and abnormal returns during the Russia-Ukraine war.
This will act as the setting for the main research question with the following sub-question:


The following hypotheses will be tested:
Hypothesis 1a:
H0: A portfolio consisting of European stocks with a high ESG rating does not yield abnormal
risk-adjusted returns during the Russia-Ukraine war, 𝛼 = 0.
22
HA: A portfolio consisting of European stocks with a high ESG-rating does yield abnormal
risk-adjusted return during the Russia-Ukraine war, 𝛼 ≠ 0.
Hypothesis 1b:
H0: A portfolio consisting of European stocks with a low ESG rating does not yield abnormal
risk-adjusted returns during the Russia-Ukraine war, 𝛼 = 0.
HA: A portfolio consisting of European stocks with a low ESG-rating does yield abnormal
3.2 Scientific Perspective
Ontology, which is the theory of the nature of reality, can be divided into two contrasting
types: objectivism and constructionism. Objectivism holds that reality exists independent of
its observers, while constructionism maintains that reality is created through social
interaction. Epistemology, the theory of knowledge, is influenced by one’s position on reality.
For example, positivism follows an objective ontological position. From this viewpoint, the
appropriate way to gather knowledge is to directly or indirectly observe or measure social
phenomena. Furthermore, the logic of positivist social science is deductive, meaning that the
hypotheses subjected to testing are deduced from a theory. Quantitative research involves
collecting and analysing numerical data in the attempt to measure social phenomena and the
relationships between them. This approach, which is based on objectivism and positivism,
employs a deductive method in which hypotheses are deduced from a theory and tested
through empirical data (Bell, Bryman and Harley, 2019).
Since the aim of this thesis is to study the effect of ESG ratings on portfolio returns during
times of crisis, it is appropriate to conduct a quantitative study. By using this approach, we
can draw conclusions about the relationship between ESG ratings and portfolio returns based
on objective measurements (for example alpha and beta coefficients) and test these
conclusions against the hypotheses presented above.
23
3.3 Method
3.3.1 Data Collection
The strategy used in this study is "buy and hold" with annual rebalancing of the portfolios.
The data is collected from Refinitiv Eikon data terminals for both ESG scores and stock
market data. The three factors for our Fama-French model are retrieved from the Kenneth R.
French data library. Using Refinitiv Eikon's Screener tool, we select active public companies
incorporated in Europe with a market capitalization of over 300 million euros for our sample.
ESG scores and company market caps are retrieved for the years 2014–2021. The total return
that incorporates dividends is used for monthly returns for the chosen time periods, from
January 2015 to December 2019 (before the crisis) and from February 2022 to October 2022
(during the Russia-Ukraine war). The robustness test is conducted with data from January
2020 to December 2021 (during COVID-19). Companies that are missing any of the above-
mentioned values are omitted, reducing the sample size from 2,501 to 761 companies. One
reason for the high number of exclusions from the sample is that the Refinitiv Eikon database
did not begin providing coverage of the ESG scores of European small and midcap companies
until 2019 (Refinitiv, 2022). Each year, companies are sorted by their ESG ratings: The top 20
percent (fifth quintile) compose the high ESG portfolio, whereas the bottom 20 percent (first
quintile) compose the low ESG portfolio. Finally, monthly returns for any given year are
calculated using the previous year’s company weight. All calculations are performed in
Microsoft Excel.
As pointed out earlier, the Russia-Ukraine war has had the largest impact on countries that are
geographically close to the conflict. That is why this study was limited to the European
market (Boungou and Yatié, 2022). According to Deng et al. (2022) microcap stocks should
be excluded from research as they might distort the results. The U.S. Securities and Exchange
Commission defines microcap stocks as companies with a market capitalization of less than
$250 or $300 million (U.S. Securities and Exchange Commission, 2013). Because most of the
companies included in the sample are based in the Eurozone, the market capitalization cut-off
was converted from dollars to euros. The exchange rate for USD to EUR was 1.0087 on
October 31st, 2022 (European Central Bank, 2023). We rounded the exchange rate down to
24
the nearest integer, and therefore, a 300-million-euro threshold was applied when selecting
companies for the sample. Furthermore, Annaert et al. (2011) have stated that the overall
stock market can be mimicked with a limited number of the largest stocks. This supports the
choice to limit the study to a sample of larger stocks since any change or effect in the overall
stock market should be reflected in the performance of larger companies.
Three different time periods are examined in this study: before the crisis, during the war and
during COVID-19. Following the method of Bae et al. (2020), we selected a 60-month period,
spanning from January 2015 to December 2019, as the before crisis period. This time period
will be used as the baseline for comparison with the periods of the Russia-Ukraine war and
the COVID-19 pandemic. The war period examined in this study covers the duration of the
war from its onset in February 2022 until data collection in October 2022. In order to validate
our results, we conducted a robustness test using a longer time frame, from January 2020 to
December 2021. This was prompted by the insignificant results obtained from the original
test.
Table 1: Summary of Time Periods and Sample Sizes.

Time Portfolios Sample based on Observations
period ESG rating
Before January High ESG Fifth quintile; 9,120

crisis 2015- 152 companies
December Low ESG First quintile; 9,120

2019 152 companies
During war February High ESG Fifth quintile; 1,368

2022- 152 companies
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October Low ESG First quintile; 1,368
2022 152 companies
During January High ESG Fifth quintile; 3,648

COVID-19 2020- 152 companies
December Low ESG First quintile; 3,648

2021 152 companies
Table 1 displays the sample sizes for each of the time periods studied, before crisis, wartime and the
COVID-19 pandemic (source: own contribution).
Bell, Bryman and Harley (2019) propose a sample size of around 1,000 observations for
quantitative research. This criterion is fulfilled for all time periods.
Refinitiv Eikon covers over 85% of the global market cap across more than 630 ESG metrics,
making it one of the largest ESG content collection operations in the world (Refinitiv, n.d.-a).
They aggregate and analyse publicly available information sources with local language
expertise in order to provide up-to-date and objective data. They strive to achieve 100% data
quality by combining both algorithmic and human processes, e.g., by performing sample
audits on a daily basis (Refinitiv, n.d.-b). For the reasons outlined above, we chose to retrieve
ESG data from Refinitiv Eikon. In previous research on ESG and CSR, the Refinitiv Eikon
database has also been used (e.g., Ding et al., 2020). In addition, we selected the Kenneth R.
French data library as a source due to its compatibility with the FF3FM, which we apply to
our analysis.
The decision to build portfolios by dividing the companies into the fifth and first quintiles
based on their ESG scores stems from Aybars and Zehir’s study (2020). In their study, a 10%
cut-off rate was used to build top and bottom portfolios (Aybars and Zehir, 2020). However,
as some alpha values were insignificant at the 0.05 significance level, we chose to increase the
cut-off value to 20% in order to obtain more observations in order to achieve better results.
26
3.3.2 Description of Variables
Refinitiv Eikon Variables
The Refinitiv Eikon ESG score is a combined score based on the company’s performance in
the following categories or pillars: environmental (emissions, resource use and innovation),
social (community, human rights, product responsibility and workforce) and corporate
governance (shareholders, CSR strategy and management). The ESG score is a relative sum
of the category weights, which vary per industry for the environmental and social categories.
However, they remain the same across all industries for corporate governance.
Figure 4: The calculation of pillar scores.
Figure 4 show the weight of each pillar which contribute to the total ESG score (Refinitiv, 2022).
The Company Market Capitalization is calculated by multiplying all issue level share types by
the latest close price at the end of each calendar year. The monthly total returns incorporate
the price change and dividends for the period (source: Eikon database). The currency is euros.
27
Kenneth R. French’s Data Library
The variables for the FF3FM, the excess return on the market (the portfolio’s return less the
risk-free rate of return), the size of firms (SMB or small minus big), book-to-market ratio
(HML or high minus low) and the risk-free rate of return are retrieved from the Kenneth R.
French data library. The data used in this study is from Fama/French European 3 Factors
between January 2015 and October 2022 (Kenneth R. French Data Library, 2023).
The European developed market includes the following countries: Austria, Belgium,
Denmark, Finland, France, Germany, Great Britain, Greece, Ireland, Italy, Netherlands,
Norway, Portugal, Spain, Sweden and Switzerland.
The excess return on the market is computed by the value-weighted portfolio return (including
dividends and capital gains) less the US one-month T-bill rate.
Stocks are sorted by size (market capitalization) and book-to-market ratio. The top 90% of
June market cap compose the big stocks, whereas bottom 10% compose the small stocks.
Book-to-market ratio is calculated by dividing the book value for the fiscal year ending in
calendar year (𝑡 − 1) by the market cap at the end of December calendar year (𝑡 − 1). The
book-to-market breakpoints are the 30th and 70th percentiles for big stocks. As a result, six
portfolios are formed: Small Value, Small Neutral, Small Growth, Big Value, Big Neutral and
Big Growth (Fama and French, 2012).
28
Figure 5: Value-weighted portfolios.
Figure 5 illustrates the construction of the six value-weighted portfolios. (Kenneth R. French Data
Library, 2023).
SMB, or small minus big, is the average return on the three small portfolios less the average
return on the three big portfolios in Europe.
HML, or high minus low, is the average return on the two value portfolios less the average
return on the two growth portfolios in Europe.
(Kenneth R. French Data Library, 2023)
Dependent Variables
To measure the excess return of the portfolio the dependent variable is defined as monthly
return less the risk-free rate of return.
29
The Refinitiv Eikon variables, including monthly total returns, companies’ market
capitalization and ESG scores, are imported to Excel, where the following calculations are
performed.
Firstly, company weights are computed based on market capitalization. The previous year’s
company weight is used to calculate the current year’s weighted monthly returns.
𝑀𝑎𝑟𝑘𝑒𝑡𝐶𝑎𝑝𝑖
𝑤𝑖 = 𝑛
∑𝑖=1 𝑀𝑎𝑟𝑘𝑒𝑡𝐶𝑎𝑝𝑖
Secondly, the company weight is multiplied by the change factor for January in order to
compute the weighted return.
𝑟𝑤,𝑖𝑡 = 𝑤𝑖 × (1 + 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝐽𝑎𝑛 )
Weighted returns for the months between February and December are computed by
multiplying the previous month’s weighted return by the change factor for the current
month.
𝑟𝑤,𝑖𝑡 = 𝑟𝑤,𝑖𝑡−1 × (1 + 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑡
Thirdly, the weighted returns for each month are added together.
∑ 𝑟𝑤,𝑖𝑡
𝑖=1
Fourthly, the current month’s weighted return is divided by the previous month’s weighted
return, and subtracted by one, in order to compute the monthly portfolio return.
30
𝑟𝑤,𝑖𝑡
𝑟𝑝 = −1
𝑟𝑤,𝑖𝑡−1
Lastly, the monthly portfolio return is subtracted by the risk-free rate of return.
These final values are the dependent variables in the CAPM and FF3FM.
Independent Variables
The independent variables in the CAPM and FF3FM are retrieved from Kenneth French’s
data library using monthly data between January 2015 and October 2022.
The independent variable for the CAPM is the excess return on the market calculated by
subtracting the risk-free rate of return from the market return. Fama and French have used the
US one-month T-bill rate as the risk-free rate of return. The market returns are in US dollars.
The independent variables for the FF3FM are excess return on the market, SMB (small minus
big) and HML (high minus low).
3.3.3 Portfolio Formation
The portfolios were formed by organizing companies each year in descending order based on
their ESG score. The top 20% of companies compose the high ESG portfolio, whereas the
bottom 20% compose the low ESG portfolio. We used ESG scores from years 2014-2021 to
construct the portfolios for the years 2015-2022, i.e., last year’s ESG rating was utilized in the
portfolio formation for the current year.
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In total six portfolios were formed:
1. High ESG Before Crisis
2. Low ESG Before Crisis
3. High ESG During War
4. Low ESG During War
5. High ESG During COVID-19
6. Low ESG During COVID-19
The portfolios before the crisis consisted of monthly returns from January 2015 to December
2019. The portfolios during war cover the time period from February to October 2022.
Finally, a robustness test will be performed by analysing the monthly returns between January
2020 and December 2021. Each portfolio is tested against both the CAPM and FF3FM.
3.3.4 Empirical Models
In order to study the relationship between ESG ratings and abnormal returns during crisis
periods, Jensen’s alpha, Sharpe ratio, the CAPM and FF3FM were chosen.
CAPM is used since it is straight forward and one of the most established models in financial
theory. Due to its limitation in just using one factor, we supplement the analyses with the
FF3FM. The model is utilised in several other studies with satisfactory results. This facilitates
comparisons between our study and previous research.
32
Factor Models
CAPM
𝑟𝑝 = 𝑟𝑓 + 𝛽(𝑟𝑚 − 𝑟𝑓 )
Where:
𝛽=beta
FF3FM (Fama & French, 1993)
𝑟𝑝 − 𝑟𝑓 = 𝛼𝑝 + 𝛽𝑝,𝑀𝐾𝑇 (𝑟𝑚 − 𝑟𝑓 ) + 𝛽𝑝,𝑆𝑀𝐵 𝑆𝑀𝐵 + 𝛽𝑝,𝐻𝑀𝐿 𝐻𝑀𝐿
Where:
𝑆𝑀𝐵=small minus big
𝐻𝑀𝐿=high minus low
𝛽𝑝,𝑀𝐾𝑇 , 𝛽𝑝,𝑆𝑀𝐵 and 𝛽𝑝,𝐻𝑀𝐿 =coefficients of the three independent variables
OLS
The theory section of this thesis often discusses the use of regression, which is a method to
understand the relationship between two variables. Specifically, this thesis uses regression to
conduct performance benchmark models. One important concept in regression is Ordinary
33
Least Squares (OLS). OLS is a statistical method used to determine the linear relationship
between two variables, which can be represented by the equation:
𝑌𝑖 = 𝛽0 + 𝛽1 𝑋𝑖 + 𝑢𝑖
Where Y is the dependent variable, X is the independent variable, and u is the error term. The
goal of OLS is to find the line that best fits the data points in a scatter plot by minimizing the
sum of the squared residuals, which are the differences between the predicted values and the
actual values.
When there are multiple independent variables, the OLS equation can be expanded to include
them as well:
𝑌𝑖 = 𝛽0 + 𝛽1 𝑋𝑖 + ⋯ + 𝛽𝑘 𝑋𝑘𝑖 + 𝑢𝑖
This allows for the examination of the impact of multiple factors on the expected outcome.
However, as the number of dimensions increases, it becomes more difficult to visualize the
line in a scatter plot. Nonetheless, the objective of regression remains the same: minimizing
the sum of squared residuals (Stock and Watson, 2015).
Performance Measures
Jensen’s alpha (Jensen, 1968) is a measure to quantify the abnormal return of a portfolio
compared to the expected return predicted by a theoretical model, such as the CAPM.
(𝑟𝑝 − 𝑟𝑓 ) = 𝛼𝑝 + 𝛽𝑝 (𝑟𝑚 − 𝑟𝑓 )
Where:
34
𝛽𝑝 =portfolio beta
Sharpe Ratio
𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 =
𝜎𝑝
Where:
𝜎𝑝 = standard deviation of the portfolio’s excess return
As presented in chapter 2.6., the higher the Sharpe ratio, the greater the risk-adjusted return of
an investment.
3.4 Reliability and Validity
A key factor when it comes to reliability is stability. Will the results repeat when studying
another period of time for instance? Of course, the aim is little fluctuation over time.
However, circumstances may shift to an extent that the results are not as steady as would have
been desired (Bell, Bryman and Harley, 2019). In order to test the stability of our research, a
robustness test is conducted where a similar comparative period is investigated.
An aspect that is important to consider in all research is the validity of the results. Are the
measurements applicable for the concept studied? There are a number of different validity
tests, of which "face validity” is the most crucial. Face validity means that authorities within
the field of research are consulted for the purpose of ascertaining the measurements. (Bell,
Bryman and Harley, 2019) Since the present study does repeat earlier research methods and
uses similar measurements, where validity tests have already been conducted, the issue is not
35
that considerable here. However, during the development of the research design, the
supervisor with a greater knowledge in the field than ours, was asked for input.
The models used in this thesis are based on well-known researchers and theories relevant to
the subject of this study. Furthermore, the authors of the thesis have provided a detailed
description of data collection, choice of variables, and model construction along with their
motivations. This thesis attempts to ensure that the reliability and validity concepts are held to
the fullest possible extent.
3.5 Source Critical Considerations
The background material for this thesis is obtained from highly ranked publications. Even so,
one must always apply a critical mind when reading research. In order to limit potential error
sources, we obtained information from several different studies.
The data collection is gathered from Refinitiv Eikon and Kenneth R. French data library,
which are reliable sources for financial data, used by both professional practitioners and
researchers. It is also recommended by Stockholm Business School for such purposes. The
reliability of the collected data has further been ensured by comparing samples with data from
other sources.
3.6 Research Ethical Reflections
The study is quantitative, and all the data collected is public. This means that ethical
considerations when conducting the study are negligible (Bell, Bryman and Harley, 2019).
Another aspect to keep in mind is how the results of the study can be used, or potentially
misused. There seems to be a small risk of this happening with our thesis, since the topic is
rather uncontroversial.
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4. Analysis and Findings
4.1 Descriptive Statistics
In Table 2, the descriptive statistics for the Market, high and low ESG portfolios before the
crisis are presented. The dependent variables, excess portfolio returns, are shown in columns
high ESG and low ESG, whereas the independent variables, excess return on the market,
small minus big, high minus low and the risk-free rate are displayed in columns MKT-RF,
SMB, HML and RF, respectively.
Table 2: Descriptive Statistics Before Crisis.

Descriptive MKT- SMB HML RF High Low
Statistics RF ESG ESG
Before
Crisis
Min -8.54% -2.97% -4.99% 0.00% -14.45% -16.37%
Max 6.70% 3.77% 6.36% 0.21% 20.40% 17.11%
Median 0.59% 0.06% -0.43% 0.06% 0.83% 0.97%
Mean 0.51% 0.22% -0.26% 0.08% 0.45% 0.65%
Skewness -0.27 0.12 0.45 0.35 0.48 -0.31
Kurtosis -0.60 -0.47 1.14 -1.42 4.61 2.64
37
Monthly 3.67% 1.52% 1.98% 0.07% 4.89% 5.04%
St.Dev.
Monthly 0.13% 0.02% 0.04% 0.00% 0.24% 0.25%

Variance
Monthly 0.44% 0.21% -0.28% 0.08% 0.33% 0.52%

Geometric
Return
Annualized 12.70% 5.25% 6.85% 0.25% 16.95% 17.47%

St. Dev.
Annualized 6.24% 2.71% -3.10% 0.99% 5.53% 8.09%

Return
Annualized 5.40% 2.57% -3.32% 0.99% 4.08% 6.47%

Geometric
Return
Sharpe 0.49 0.52 -0.45 3.89 0.33 0.46

Ratio
Table 2 summarizes the descriptive statistics for the Market, high and low ESG portfolios before the
crisis (source: own contribution).
The high ESG portfolio accounts for the highest excess return (20.40%) during the period
before crisis, whereas the low ESG portfolio for the lowest (-16.37%). When comparing the
mean excess returns, one can observe that the low ESG portfolio generates a higher mean
excess return (0.65%) than the high ESG portfolio (0.45%) or the market (0.51%).
38
The high ESG portfolio shows less fluctuation in its monthly excess returns, as measured by a
standard deviation of 4.89%. This is only slightly less than the low ESG portfolio, which has
a standard deviation of 5.04%. A lower standard deviation indicates that the returns of the
portfolio are closer to the mean.
The negative skewness values for the low ESG portfolio (-0.31) and excess returns for the
market (-0.27) indicate that the excess returns are only slightly skewed left, i.e., the left tail is
longer compared to the right tail, whereas for the high ESG portfolio (0.48) the opposite
applies. Negative skewness is associated with higher returns, as shown below.
Moreover, the positive excess value of kurtosis (value greater than three) for the high ESG
portfolio implies leptokurtosis, or fat-tailedness, which is common for financial asset returns.
A leptokurtic distribution indicates that the data set contains extreme values or outliers.
Conversely, a platykurtic distribution with values of less than three, such as the excess returns
for the low ESG portfolio, contains fewer outliers.
Surprisingly, the low ESG portfolio generates the highest annualized geometric excess returns
(6.47%), followed by the market (5.40%) and lastly, the high ESG portfolio (4.08%).
In Table 3, descriptive statistics for the Market, high and low ESG portfolios during the war
are presented. The dependent variables are shown in columns high ESG and low ESG,
whereas the independent variables are displayed in columns MKT-RF, SMB, HML and RF,
respectively.
39
Table 3: Descriptive Statistics During War.
Descriptive MKT- SMB HML RF High Low
Statistics RF ESG ESG
During
War
Min -10.32% -3.70% -6.01% 0.00% -6.92% -2.17%
Max 6.66% 0.62% 5.41% 0.23% 5.99% 7.70%
Median -3.77% -0.95% 1.25% 0.06% 0.73% 1.89%
Mean -2.62% -0.86% 1.05% 0.09% 0.26% 1.35%
Skewness 0.24 -0.81 -0.66 0.50 -0.28 0.66
Kurtosis -1.30 1.53 0.70 -1.53 -1.42 0.70
Monthly 5.85% 1.28% 3.40% 0.09% 4.44% 2.99%

St.Dev.
Monthly 0.34% 0.02% 0.12% 0.00% 0.20% 0.09%

Variance
Monthly -2.80% -0.87% 0.99% 0.09% 0.16% 1.30%

Geometric
Return
40
Annualized 20.28% 4.43% 11.76% 0.30% 15.37% 10.37%
St. Dev.
Annualized -27.31% -9.83% 13.38% 1.04% 3.15% 17.42%

Return
Annualized -28.86% -9.92% 12.61% 1.04% 1.94% 16.81%

Geometric
Return
Sharpe -1.35 -2.22 1.14 3.46 0.21 1.68

Ratio
Table 3 summarizes the descriptive statistics for the Market, high and low ESG portfolios during war
(source: own contribution).
The low ESG portfolio accounts for the highest excess return (7.70%) during wartime,
whereas the market for the smallest (-10.32%). On average, both portfolios outperform the
market, but the mean for the low ESG portfolio is higher (1.35% versus 0.26%). The range for
excess return on the market is the highest (varies between -10.32% and 6.66%), also implied
by the highest standard deviation, 5.85%. By comparing the annualized geometric returns for
the market before and after the war (7.49% and -28.86%, respectively), it is evident that the
war has negatively affected the stock market in Europe.
The positive skewness values for the low ESG portfolio (0.66) and the market (0.24) indicate
that the excess returns are skewed right, i.e., the right tail is longer compared to the left tail,
whereas for the high ESG portfolio (-0.28) the opposite applies. Moreover, both portfolios
and the market have kurtosis values of less than three, entailing platykurtic distributions.
Similarly to the before crisis period, the low ESG portfolio generates the highest annualized
geometric excess returns (16.81%) during wartime, and the difference to the high ESG
41
portfolio (1.94%) and the market (-28.86%) is significant. Together with the highest Sharpe
ratio (1.68), we can conclude that the low ESG portfolio outperforms the high ESG portfolio
(0.21) as well as the market (-1.35) during wartime.
4.1.1 Excess Return Index
Figure 6 displays the indexed excess returns for the market, high ESG portfolio, and low ESG
portfolio from January 2015 to December 2021. The portfolios behaved similarly with both
portfolios experiencing a sharp decline in August 2017 but also increasing in value over time.
However, since March 2017, the low ESG portfolio started producing higher returns
compared to the high ESG portfolio ultimately outperforming it by 18 points at the end of
December 2021 (184 and 166 points, respectively). The high ESG portfolio peaks at 172
points in September 2021 and has a minimum of 93 points in May 2015. The low ESG
portfolio has a maximum of 191 points in September 2021 and a minimum value of 90 points
in December 2015. Overall, the market shows an upward trend.
Figure 6: Excess Return Index Before War.
Figure 6 shows the indexed excess returns of the market, high ESG and low ESG portfolios between
January 2015 and December 2019 (source: own contribution).
42
The data in Figure 7 illustrates that at the onset of the war, both portfolios and the market
experienced a decline. However, the low ESG portfolio starts to recover quickly and surpasses
its initial value by July of the same year, and peaks at 112 points in October 2022. On the
other hand, it takes the high ESG portfolio longer to regain its initial value, achieving this in
October 2022. By the end of October 2022, the low ESG portfolio had outperformed the high
ESG portfolio by approximately 20 points. Despite this difference, both portfolios performed
better than the market as a whole.
Figure 7: Excess Return Index During War.
Figure 7 displays the indexed excess returns of the market, high ESG and low ESG portfolios during
wartime, from February 2022 to October 2022 (source: own contribution).
4.1.2 Multicollinearity
The independent variables, excess return on market, SMB and HML, are tested for
multicollinearity before regression analyses are conducted. We will test for both perfect
multicollinearity, and near multicollinearity by calculating the variance inflation factors
(VIF).
43
To a certain degree, multicollinearity is always present in econometric analysis as the
independent variables in a regression model are usually correlated with each other.
Multicollinearity only becomes an issue when the correlation is very high (Turner, 2021).
Perfect multicollinearity occurs when two or more variables are perfectly correlated with each
other, i.e., their correlation coefficient is equal to 1.0. There is no indication of perfect
multicollinearity among the variables. The highest correlation coefficient, 0.38, is between
excess return on market and HML in the before war period. It is noteworthy that HML and
SMB were negatively correlated before the war.
Table 4: Factor Correlations Before the Crisis.

MKT-RF SMB HML
MKT-RF 1
SMB 0.199785945 1
HML 0.379956411 -0.06047 1
Table 4 presents the factor correlations between the independent variables, excess return on market,
SMB and HML, before the crisis (source: own contribution).
Similarly, we do not detect perfect multicollinearity during war. The highest absolute
correlation is between the excess return on market and SMB during wartime, 0.49. HML is
negatively correlated to both the excess return on market and SMB during wartime.
44
Table 5: Factor Correlations During War.
MKT-RF SMB HML
MKT-RF 1
SMB 0.48842366 1
HML -0.1379606 -0.38729 1
Table 5 presents the factor correlations between the independent variables, excess return on market,
SMB and HML, during wartime (source: own contribution).
In practice, it is more common to encounter near multicollinearity. Near multicollinearity

refers to a situation in which two or more independent variables are highly correlated, but not
perfectly correlated. If the variance inflation factor, or VIF, is between 1 and 5, it indicates
that the variables are moderately correlated with each other. A VIF value between 5 and 10
indicates high correlation between the variables.
Table 6 presents the VIF values for the independent variables, excess return on market, SMB
and HML, before wartime. Before the crisis, excess return on the market had the highest VIF
value of 1.24. As the VIF values are between 1 and 5, the dependent variables are moderately
correlated to each other.
45
Table 6: Variance Inflation Factor Test Before Crisis.
VIF values Before
Crisis
Independent VIF
Variable
MKT-RF 1.240958247
SMB 1.065701305
HML 1.195798082
Table 6 presents the VIF values for the independent variables before the crisis (source: own
contribution).
Table 7 presents the variance inflation factors, VIF, for the independent variables, excess
return on market, SMB and HML, during wartime. During wartime, SMB has the highest VIF
value of 1.52. The independent variables are only moderately correlated since the VIF values
are greater than 1, but less than 5.
46
Table 7: Variance Inflation Factor Tests During War.
VIF values During
War
Independent VIF
Variable
MKT-RF 1.31863774
SMB 1.52179547
HML 1.18124223
Table 7 presents the VIF values for the independent variables during wartime (source: own
contribution).
To sum up, as the independent variables are not highly correlated, they can be included in the
models, and no remedial actions are needed.
4.2 Empirical Results
In this section, the empirical results are presented and analysed. First, we analyse the
empirical results of the CAPM and FF3FM before and during wartime. Secondly, we will
analyse the results of the robustness test with both the CAPM and the FF3FM before and
during wartime.
47
4.2.1 CAPM and FF3FM Regression Results
High ESG Portfolio Before and During Wartime
Table 8 presents the coefficients for the CAPM and FF3FM for high ESG portfolios. We will
interpret the meaning of all coefficients. However, the focus of this study is excess portfolio
returns, otherwise known as alpha.
The intercept or alpha specifies the risk-adjusted return for the portfolio. Values above zero
indicate that the portfolio outperforms the market and contrarily, negative alpha depicts a
lower yield as compared to the market.
The alpha coefficients show that a high ESG portfolio outperforms the market before war but
underperforms it during wartime. However, before war, both models exhibit close to zero
abnormal returns (CAPM: 0.5% and FF3FM: 0.6%). During war, both models exhibit
negative alphas, -0.4% and -1.5%, respectively. Since the alphas for the high ESG portfolio
are higher before than during war, this implies that companies with high ESG ratings do not
perform better during crises, according to the sample. Nevertheless, the alphas both before
and during wartime are statistically insignificant at the 10% significance level as evidenced by
the p-values which range between 34.9% and 84.1%.
The negative betas both before and during wartime imply that the portfolio is negatively
correlated with the market. The high p-values ranging between 41.1% and 99.7%, however,
indicate that the factor coefficients are not scientifically significant.
The SMB factor coefficients are negative both before and during wartime. This implies that
big companies outperform small companies between January 2015 and October 2022
(excluding January 2022), contrary to the theory behind the FF3FM. The difference is even
more significant during wartime, which could imply that larger companies are more adaptable
to adverse events. However, neither coefficient is scientifically significant considering the
high p-values (35.5% and 16.4%, respectively).
48
The HML factor coefficient is positive before the war, but negative during wartime. The
implication of this is that growth stocks outperform value stocks, which is inconsistent with
Fama and French (1993). Similarly to the other coefficients, however, these values are not
scientifically significant since the p-values are 44.9% and 64.3%, respectively. This goes
against the fundamental assumption of the FF3FM that SMB and HML are not important.
R-squared values close to zero indicate that the dependent variable, excess portfolio returns,
cannot be explained by the independent variables, which is the case for the CAPM model
before war. The FF3FM during war has the highest R squared value of 41.3% indicating that
the independent variables, excess return on market, SMB and HML, explain circa 41.3% of
the variation in the dependent variable.
The negative adjusted R-squared values for both models before war and for the CAPM during
war indicate that the model fits the data very poorly. This implies the insignificance of the
independent variables, excess return on market, SMB and HML, for all models except for the
FF3FM during war. This means that there are other factors that explain the variations in
excess portfolio returns. The FF3FM has more explanatory power for excess portfolio returns
as evidenced by the adjusted R-squared values. Despite this, the relatively low adjusted R-
squared value for the FF3FM during wartime, 6%, is not optimal.
49
Table 8: Time Series Regression Results for High ESG Portfolios.
High ESG Before Crisis During War
Portfolio
CAPM FF3FM CAPM FF3FM
Alpha 0.004543 0.006235 -0.003644 -0.015486

(0.482849) (0.348975) (0.840565) (0.439902)
MKT-RF -0.008550 -0.036104 -0.237663 -0.001328

(0.961250) (0.840776) (0.411468) (0.996620)
SMB -0.398081 -2.394574

(0.354513) (0.163566)
HML 0.253326 -0.240034

(0.449092) (0.642800)
Observations 60 60 9 9
R-square 0.000041 0.026902 0.098241 0.412791
Adjusted -0.017200 -0.025228 -0.030582 0.060466

R^2
Table 8 shows the empirical results for the high ESG portfolio for the CAPM and FF3FM before and
during wartime. Columns 2 and 3 represent the period before the war, from January 2015 to December
2019. Columns 4 and 5 represents the wartime period from February 2022 to October 2022. The p-
values are presented in parentheses (source: own contribution).
50
Low ESG Portfolio Before and During Wartime
Table 9 shows the coefficients of the CAPM and FF3FM for low ESG portfolios.
Contrary to the high ESG portfolio, the low ESG portfolio exhibits positive alphas before and
during wartime. The alphas are scientifically insignificant at the 10% level of significance as
the p-values range between 22.7% and 94.3%. This attests that low ESG portfolios do not
yield abnormal risk-adjusted returns neither before nor during wartime.
Before war, the CAPM implies that the low ESG portfolio is positively correlated to the
market, whereas the opposite applies during war. According to the FF3FM, the low ESG
portfolio is negatively correlated to the market before war and positively correlated during
war. However, the coefficients are not significant at the 10% level of significance as the p-
values range between 41.5% and 92.6%.
Similar to the high ESG portfolio, the SMB coefficients are negative both before and during
war whereas the HML coefficient is positive before war but negative during war. However,
contrary to the results of the high ESG portfolio, the SMB and HML coefficients for the low
ESG portfolio during war are scientifically significant at the 10% level. This implies that big
companies outperform small companies, and growth stocks outperform value stocks during
times of crisis.
Except for the FF3FM during wartime, the R-squared values for the models are low (0.0%-
9.7%). Consequently, the adjusted R-squared values are negative for both models before war
and the CAPM during wartime. In conclusion, the model with the highest explanatory power
is the FF3FM during war with an R-squared value of 75.6%. Moreover, the model has the
highest adjusted R-squared value of 60.9% indicating that 60.9% of the variance in excess
portfolio returns can be attributed to the independent variables.
51
Table 9: Time Series Regression Results for Low ESG Portfolios.
Low ESG Before Crisis During War
Portfolio
Alpha 0.006366 0.008277 0.009293 0.000601

(0.340908) (0.227015) (0.456195) (0.943261)
MKT-RF 0.026820 -0.017219 -0.159171 0.038573

(0.882476) (0.925625) (0.415006) (0.778374)
SMB -0.247924 -2.227020

(0.573367) (0.017504)
HML 0.432848 -0.498746

(0.209753) (0.065185)
R Square 0.000380 0.035291 0.096839 0.755615
Adjusted -0.016855 -0.016390 -0.032184 0.608985

R^2
Table 9 presents the empirical results for the low ESG portfolio for the CAPM and FF3FM before and
during wartime. Columns 2 and 3 represent the period before the war, from January 2015 to December
2019. Columns 4 and 5 represent the wartime period from February 2022 to October 2022. The p-
values are presented in parentheses (source: own contribution).
52
Overall, the test results indicate that neither high nor low ESG scores generate excess returns
before or during wartime. It is in accordance with the EMH, which indicates that all
information is reflected in prices, so investors cannot earn abnormal returns by adopting
different strategies. However, our analysis of the low ESG portfolio revealed that big
companies outperform small companies, and growth stocks outperform value stocks during
times of crisis. It is worth noting that in this study, the level of significance was set at 10%.
Except for the SMB coefficient for the low ESG portfolio during war, no other coefficients
were significant at the 1% or 5% level.
4.2.2 Robustness Test
Table 10 presents the coefficients for the CAPM and FF3FM for high ESG portfolios before
and during COVID-19.
The alpha values for both models are positive before and during COVID-19. In contrast, the
alpha values for the high ESG portfolio are negative alphas during war. The results, as
indicated by the p-values at the 10% level of significance, show that the high ESG portfolio
outperformed the market during COVID-19, with excess returns of 1.0% and 1.1% according
to the CAPM and FF3FM, respectively.
The beta coefficients for the regression analyses are negative before COVID-19, but positive
during COVID-19. Contrary to this, the beta coefficients of the high ESG portfolio are
negative during wartime. Nevertheless, the p-values for all beta coefficients are high, ranging
from 24.2% to 96.1%, signifying that they are not statistically significant.
Before COVID-19, the SMB coefficient is negative (-40.0%), while the HML coefficient is
positive (25.3%). During COVID-19, both coefficients are positive at 16.8% and 10.0%,
respectively, in contrast to the results during war. Regardless, the SMB and HML coefficients
are still insignificant for all models, in line with our previous findings.
53
The models have limited explanatory power, as the highest R-squared value is only 8.3% for
the FF3FM during COVID-19. The CAPM has higher adjusted R-squared values during the
COVID-19 period compared to the war period, but the opposite is true for the FF3FM.
However, the adjusted R-squared values remain low, suggesting that the models are not a
good fit for the data or that there are other factors influencing excess returns that are not being
accounted for in the models.
Table 10: Time Series Regression Results for High ESG Portfolios.
High ESG Before Crisis During COVID-19
Portfolio
Alpha 0.004543 0.006235 0.010331 0.010908

(0.482849) (0.348975) (0.069034) (0.079829)
MKT-RF -0.008550 -0.036104 0.102787 0.044261

(0.961250) (0.840776) (0.241868) (0.724130)
SMB -0.398081 0.168159

(0.354513) (0.595820)
HML 0.253326 0.096638

(0.449092) (0.568714)
R Square 0.000041 0.026902 0.061695 0.082869
54
Adjusted -0.017200 -0.025228 0.019045 -0.054700
R^2
Table 10 shows the empirical results for the high ESG portfolio for the CAPM and FF3FM before and
during COVID-19. Columns 2 and 3 represent the period before COVID-19, from January 2015 to
December 2019, and columns 4 and 5 represent the COVID-19 period from January 2020 to
December 2021. The p-values are presented in parentheses (source: own contribution).
In contrast to our previous findings, the low ESG portfolio yields abnormal risk-adjusted
returns during COVID-19, as indicated by the statistically significant alpha values in the
CAPM and FF3FM. These results show that the low ESG portfolio slightly outperforms the
market, with returns of 1.2% for both models.
During both time periods, the beta coefficient for the CAPM is positive, while it is negative
for the FF3FM. According to our previous results, the beta coefficient is positive for the
CAPM before the crisis and negative during the crisis, while the opposite is true for the
FF3FM. Regardless, these coefficients are not statistically significant, as the p-values range
between 57.5% and 92.3%. This is consistent with the previous results.
The SMB coefficient is negative prior to COVID-19, but positive during COVID-19. On the
other hand, the HML coefficient is positive in both time periods. However, these values are
not statistically significant, which does not align with our previous findings during wartime
that showed large companies outperforming small companies and growth stocks
outperforming value stocks during wartime.
Similar to the high ESG portfolio, the models exhibit limited explanatory power, with the
highest R-squared value being 12.3% for the FF3FM during COVID-19. In contrast, the
FF3FM has an R-squared value of 75.6% during war. This suggests that the models are not a
good fit for the data during COVID-19. Consequently, the highest adjusted R-squared value
of -0.01% during COVID-19 is significantly lower than during war (60.9%).
55
Table 11: Time Series Regression Results for Low ESG Portfolios.
Low ESG Before Crisis During COVID-19
Portfolio
Alpha 0.006366 0.008277 0.012262 0.011769

(0.340908) (0.227015) (0.045352) (0.065176)
MKT-RF 0.026820 -0.017219 0.052074 -0.055174

(0.882476) (0.925625) (0.574589) (0.666615)
SMB -0.247924 0.500192

(0.573367) (0.131832)
HML 0.432848 0.101312

(0.209753) (0.558281)
R Square 0.000380 0.035291 0.014543 0.122857
Adjusted -0.016855 -0.016390 -0.030250 -0.008713

R^2
Table 11 presents the empirical results for the low ESG portfolio for the CAPM and FF3FM before
and during COVID-19. Columns 2 and 3 represent the period before COVID-19, from January 2015 to
December 2019, and columns 4 and 5 represent the COVID-19 period from January 2020 to
December 2021. The p-values are presented in parentheses (source: own contribution).
56
The results of the robustness test differ from those of the original study in regard to the
performance of both portfolios. According to the robustness test both portfolios yield
abnormal risk-adjusted returns during the COVID-19 period, as indicated by the significant
alpha values in both the CAPM and FF3FM. This is in contrast to previous findings which
indicated that portfolios do not yield abnormal returns during crisis periods. However, the
models have limited explanatory power during COVID-19, and the adjusted R-squared values
are low, indicating that the models were not a good fit for the data, or that there are other
factors influencing excess returns that are not being accounted for in the models.
4.2.3 Portfolio Risk and Sharpe Ratio Results
Table 12 reports the annualized volatility for every year and for the whole period.
With the exception of 2019, high ESG portfolios and low ESG portfolios compete every year
over which portfolio has the highest risk before the war. In 2015, 2017 and 2018 the low ESG
portfolio exhibits the highest risk while in 2016 the high ESG portfolio has the highest
annualized volatility. The market demonstrates the lowest risk during 2015, 2016 and 2017
with annualized volatility of 13.39%, 13.4% and 6.55%. However, in 2019 the market
experiences the highest risk. During the overall sample period the market presents robustness
against risk as it had the lowest annualized standard deviation at 12.59%. The high ESG
portfolio presents lower risk than the low ESG during the overall sample period hence it was
less volatile.
During the war the market exhibits the highest risk at 20.30%. The low ESG presents
robustness against risk during war as it shows the lowest annualized standard deviation at
10.54% during war. The high ESG displays lower risk than the market during war at 15.57%.
57
Table 12: Portfolio Annualized Volatility Before Crisis and During War.
Annualized Volatility Before Crisis and During War
Portfolio 2015 2016 2017 2018 2019 2015- 2022

2019 Feb-Oct
High 16.00% 19.45% 19.45% 12.16% 9.63% 16.78% 15.57%

ESG
Low 17.36% 15.95% 22.67% 14.08% 9.52% 17.30% 10.54%

ESG
Market 13.39% 13.40% 6.55% 12.63% 11.70% 12.59% 20.30%
Table 12 presents the annualized volatility of the portfolios for each year and for the overall period.
The monthly standard deviation of the returns for the period before war (2015-2019) and during war
(February to October 2022) is annualized and represents the annualized volatility for the overall period
(source: own contribution).
Furthermore, the Sharpe ratio for the low ESG portfolio (0.46) is higher than for the high ESG
portfolio (0.33). In other words, the low ESG portfolio outperformed the high ESG portfolio
in terms of risk-adjusted performance in the observed period before the crisis. During the war
the low ESG portfolio (1.68) outperforms the high ESG portfolio and the market (-1.35). In
conclusion, the low ESG portfolio outperforms the high ESG portfolio both before and during
war and is outperformed by the market only before war.
58
Table 13: Portfolio Sharpe Ratios Before Crisis and During War.
Portfolio Before During
Crisis War
High ESG 0.33 0.21
Low ESG 0.46 1.68
Market 0.49 -1.35
Table 13 presents the Sharpe ratios of the portfolios for the period before and during the war (source:
own contribution).
4.3 Hypothesis Testing
Hypothesis 1a:
H0: A portfolio consisting of European stocks with a high ESG rating does not yield
abnormal risk-adjusted returns during the Russia-Ukraine war, 𝜶 = 𝟎.
HA: A portfolio consisting of European stocks with a high ESG-rating does yield abnormal
In the CAPM testing the obtained result is 𝛼 = −0.003644. At the 10% level of significance,
we fail to reject H0 since the p-value 0.84056505 > 0.1.
In the FF3FM testing the obtained result is 𝛼 = −0.015486. At the 10% level of significance,
59
Hypothesis 1b:
H0: A portfolio consisting of European stocks with a low ESG rating does not yield
abnormal risk-adjusted returns during the Russia-Ukraine war, 𝜶 = 𝟎.
HA: A portfolio consisting of European stocks with a low ESG-rating does yield abnormal
In the CAPM testing the obtained result is α = 0.009293. At the 10% level of significance,
In the FF3FM testing the obtained result is α = 0.000601. At the 10% level of significance,
Thus, both empirical models fail to reject the null hypotheses for both high and low ESG
portfolios.
60
5. Discussion and Critical Reflection
The findings from chapter 4 are here discussed in light of previous research presented in
chapter 2 and what the results could depend upon. When discussing the results, the research
questions are kept in mind:


5.1 Portfolio Returns
This study does not indicate any clear relationship between ESG ratings and portfolio returns
during the crisis. As mentioned in chapter 4, the results are almost exclusively statistically
insignificant. This is true both for the CAPM and FF3FM analyses. However, the
insignificance of this thesis does not mean that the study per se shows a neutral correlation
between ESG scores and stock performance. It should rather be understood that based on the
present data no conclusion can be drawn whether there is any correlation or not.
Even though there are ambiguities in earlier research, most of the previous studies
demonstrate a positive correlation between ESG/CSR and stock price. For example, Lins,
Servaes and Tamayo (2017) conclude that a strong CSR engagement seem to pay off during
times of uncertainty. Their study is performed on the Great recession. The findings in this
thesis, however, cannot support that conclusion when it comes to the Russia-Ukraine war.
According to Bassen, Busch and Friedes’s (2015) meta-study a positive correlation is detected
in almost half of previous the previous studies. But second to that, almost a quarter of them
find no correlation.
61
Furthermore, the requirements for statistically significant results are strict. At a 90 percent
level of confidence, one must be assured that the results are solid and not null. It is therefore
not unexpected to get statistically insignificant results in such a study as this one.
5.2 Portfolio Volatility
Following the discussion of portfolio returns, there should be a mentioning of the volatility.
The study finds that during war, the market portfolio displays the highest level of risk as
determined by the annualized volatility, while the low ESG portfolio exhibits the lowest level
of risk. As measured by the beta, this study indicates that the volatility of the portfolios
depends almost solely on idiosyncratic risk. The results are, however, not statistically
significant.
5.3 Possible Explanations of the Results
If the present results imply that there is not any correlation, one could derive it from the
efficient market hypothesis explained in chapter 2. The Efficient Market Hypothesis strong
and semi-strong forms suggest that all available data is already reflected in the stock price.
Thus, the value of Jensen’s alpha would be null if either of the forms were valid (Fama,
1970). If this is the case, however, an obvious objection would be: Why do most of the earlier
studies demonstrate a correlation?
The results of this thesis align with those of Aybars and Zehir (2020). They have a long
sample period – 2004 to 2018, partially overlapping our reference period of 2015 to 2019 –
and study similar markets (they include Turkey in addition to the European market).
Since most of the research consulted is conducted on a period that ends before our first period
even starts, it could be so that the effects are already priced in the stock market. Zhang (2017)
mentions that a lot of attention in recent years has been directed towards ESG and that, had it
been an advantage earlier, these effects could have been transient.
62
A similar explanation could be made based on Buchanan et al. (2018). They observe
relatively better financial results of companies focusing on CSR prior to the Great Recession.
However, this turns into a weaker performance during the crisis. A possible development is
that the market has taken these irregularities into account why no differences can be detected
any longer. This would explain if a neutral correlation between ESG index score and stock
return is to hand.
Another take on previous research vis-à-vis these results is that there are studies
demonstrating positive, negative as well as no correlation. Even though the support for a
positive correlation exceeds, there is still no consensus for that conclusion. This thesis cannot
be put in the weighing scale on any side, but it could further indicate that the research
situation of this topic is unclear.
Most of the previous research is done on the U.S. market. There might be differences in how
ESG ratings correlate with stock performance on the European market. Furthermore, since the
European market consists of several countries, contrary to the U.S. market, it might also be
more heterogeneous.
5.4 Critical Reflection
The Russia-Ukraine war is a relatively new course of events. When this study is conducted,
data is available only for nine months. Normally, a longer period of study would have been
preferred. Such shortness entails larger margins of error, and a result could be that tendencies
that with a longer period could have been statistically significant now are within the margins
of error. Anyhow, this reasoning is not valid for the comparison period, which extends to 60
months and does not either demonstrate any significance.
Due to missing values, there are a lot of companies excluded from the dataset. In chapter 3 it
is stated that the total number of companies is reduced from 2,501 down to 761, which is just
about 30 percent of the original number. Whether the obtained dataset is still representative of
the entire market or if the exclusions lead to a distortion is hard to know. In order to examine
63
this, one would have to perform a lot of manual work when analysing data from those
companies where parts of the data are missing.
The fact that most of the results show a slightly negative adjusted R-squared could indicate
that the sample is too small to explain the variables with the models in use (see chapter 4). If
the sample had been larger, it could turn the adjusted R-squared positive, and potentially
result in more values being statistically significant.
64
6. Conclusion
This thesis is conducted with the purpose of finding whether there is a correlation between
ESG and portfolio performance during times of crisis. In order to do so portfolios consisting
of stocks with high ESG ratings respectively low ESG ratings are constructed on the
European market during the Russia-Ukraine war, as well as a comparison period from 2015 to
2019. In the calculations we apply both the CAPM and the FF3FM.

The study reveals that both portfolios, especially the low ESG portfolio, outperform the
market both in terms of excess returns and risk-adjusted returns. To our assistance we develop
hypotheses, but concluding the thesis, none of their null hypotheses can be rejected. This
should not be interpreted as there is no correlation between ESG and stock performance.
Rather, our findings are not sufficiently significant to confirm either an out- or
underperformance of our portfolios in relationship to the market.
The results of the regression analyses do not provide evidence that investing in either high or
low ESG portfolios yields abnormal returns during wartime, as the alpha coefficients are not
statistically significant. In this regard, the achieved results are similar to the ones of Aybars
and Zehir who also got mostly insignificant results. However, the robustness test results
exhibit that both high and low ESG portfolios outperform the market during COVID-19,
which contradicts the findings of Oberndorfer et al. (2013).
Even though the data show insignificant results for the hypotheses, there are other interesting
findings to mention: For instance, the negative SMB and HML coefficients, which are
scientifically significant, for the low ESG portfolio during war imply that big companies
outperform small companies, and growth stocks outperform value stocks during times of
crisis.
65
The study shows that during war, the low ESG portfolio has the lowest risk. The volatility of
the portfolios is mainly driven by idiosyncratic risk, but the results lack statistical
significance.
Investing in a portfolio of companies with high ESG ratings does not always yield clear
results. This may be because the impact of events such as the Russian-Ukraine war varies
among companies. Our high ESG portfolio includes a diverse range of companies, from
tobacco companies to investment companies, making it difficult to draw conclusions from the
performance of the portfolio as a whole. The Russia-Ukraine war caused an increase in oil
prices, which affected companies in the energy sector. A study by Boldeanu et al. (2022) on
the electricity sector during the COVID-19 pandemic prove that the pandemic had a negative
impact on the abnormal returns for the electricity sector, even in high ESG rated companies.
All in all, the conclusion is that we cannot prove any correlation between ESG ratings and
portfolio performance during times of crisis. An absent correlation, which the results indicate,
is also what the efficient market hypothesis would suggest.
6.1 Future Research
One of the most critical factors of our study is the time frame. Having a nine-month sample
period is risky, and consequently the p-values for the war period were higher than those
during COVID-19. As a result of this, the alpha coefficients were statistically significant
during COVID-19, but not during wartime. This actualises the demand of repeating the study
when the war has been ongoing for a longer period.
The chosen method differentiates the analyses of high and low ESG portfolios. A combination
of portfolios where, for instance, a long position was held in high ESG stocks, and a short
position was held in low ESG stocks would enable a more direct comparison between these
66
two. This could be a more suitable way of examining the relationship between ESG and stock
performance.
Furthermore, the models in use seem to have poor explanatory power, which indicates that
other factors than those in the CAPM and FF3FM could be interesting to study. Some of the
differences between the factors in the three-factor model were considerable, for instance small
minus big (SMB). This suggests the potential for further research to focus on these factors,
potentially in conjunction with the additional factors included in the Fama-French five-factor
model. Additionally, future research studies could consider using different data providers such
as Bloomberg or MSCI or using a different cut-off rate instead of the top and bottom 20%.
67
7. Limitation of Research
There are several limitations that must be considered when interpreting the findings of this
study. One limitation is the use of ESG ratings from a single data provider, Refinitiv Eikon.
There is a lack of access to reliable and consistent data on ESG ratings, which has been an
issue in the field. (Christensen, Serafeim and Sikochi, 2021).
There is also a limitation associated with the time span. Our research covers a short period of
time with limited observations because the study was conducted amid the ongoing war
between Russia and Ukraine.
Another limitation is related to data availability. The sample size is reduced from 2,501 to 761
companies due to the exclusion of companies that were missing necessary data. This may be
partially attributed to the fact that the Refinitiv Eikon database did not begin providing
coverage of the ESG scores of European small and midcap companies until 2019 (Refinitiv,
2022).
As the portfolios are rebalanced every year during our study period, transaction costs are not
taken into account in this thesis. As a result, the evaluation of portfolios may not be accurate.
It is important to note that transaction costs can significantly impact the performance of a
portfolio, especially over the long term, and should therefore be considered when assessing
the potential return on an investment.
Furthermore, the portfolios are constructed using traditional market cap weighting, which may
make them less diversified and riskier due to a greater emphasis on larger companies.
Due to research limitations, we are unable to evaluate the volatility of our portfolios using the
CAPM. As a result, we cannot replicate the methodology used by Albuquerque et al. (2020),
who used the standard deviation of daily returns as the dependent variable and performed
regression analysis to obtain results, during the crisis period.
68
Given the limitations discussed above, along with the short timeframe for the crisis and the
selection of the sample size, the findings of this study should be interpreted with caution and
may not be generalizable.
69
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Appendices
Appendix A: Screening App Inside Refinitiv Eikon.
Appendix B: CAPM and FF3FM Regression Outputs for the Portfolios
Table 1: CAPM Regression Output for High ESG Portfolio Before Crisis.
Table 2: CAPM Regression Output for Low ESG Portfolio Before Crisis.
Table 3: CAPM Regression Output for High ESG Portfolio During the Russia-Ukraine War.
Table 4: CAPM Regression Output for Low ESG Portfolio During the Russia-Ukraine War.
Table 5: FF3FM Regression Output for High ESG Portfolio Before Crisis.
Table 6: FF3FM Regression Output for Low ESG Portfolio Before Crisis.
Table 7: FF3FM Regression Output for High ESG Portfolio During the Russia-Ukraine War.
Table 8: FF3FM Regression Output for Low ESG Portfolio During the Russia-Ukraine War.
Appendix C: List of Companies
All companies included in this study's portfolio are listed here. H indicates that they are
included in the High ESG portfolio for the following year whereas L indicates that they are
included in the Low ESG portfolio.
Company Name Country of Exchange 2021 2020 2019 2018 2017 2016 2015 2014
3I Infrastructure PLC United Kingdom L L L L L L L L
A2A SpA Italy H H
Atresmedia Corporacion de
Medios de Comunicacion SA Spain H
Anglo American PLC United Kingdom H H H H H H H
Aalberts NV Netherlands L L L
Abb Ltd Switzerland H H H H H H H H
Abrdn PLC United Kingdom H H H H H H
Associated British Foods PLC United Kingdom H
Anheuser-Busch Inbev SA Belgium
Accor SA France H H H H H
Acea SpA Italy
Ackermans & Van Haaren NV Belgium L L L L L L L L
Asseco Poland SA Poland L L L L L
ACS Actividades de
Construccion y Servicios SA Spain
Acerinox SA Spain
Koninklijke Ahold Delhaize NV Netherlands H H
Adecco Group AG Switzerland
Admiral Group PLC United Kingdom L
Aeroports de Paris SA France
Adidas AG Germany H H H H H H H H
Aegon NV Netherlands H H H
AFK Sistema PAO Russia H H
Ageas SA Belgium L
AGFA Gevaert NV Belgium
Autogrill SpA Italy H
Ashtead Group PLC United Kingdom L L L L L L
Aib Group PLC Ireland; Republic of L L L L
Airbus SE France H H H H H H
Air France KLM SA France H H
L'Air Liquide Societe Anonyme
pour l'Etude et l'Exploitation
des Procedes Georges Claude
SA France
Aixtron SE Germany L L
Arkema SA France H H H H H
Aker Solutions ASA Norway
Akzo Nobel NV Netherlands H H H H
Corporacion Financiera Alba
SA Spain L L L L L L L
Alfa Laval AB Sweden H H H H H
Allreal Holding AG Switzerland L L L L L L L L
Alior Bank SA Poland L L L L L L L
Alstom SA France H H H H H H H H
Allianz SE Germany H H H H H H H H
Amadeus IT Group SA Spain H H H
ams Osram AG Switzerland L L L L L L
Acciona SA Spain H H H H H H H H
Andritz AG Austria
Antofagasta PLC United Kingdom
AO World PLC United Kingdom L L L L L L L L
Aperam SA Netherlands H H H H H H
Aareal Bank AG Germany
Aryzta AG Switzerland L L L
Ashmore Group PLC United Kingdom
ASM International NV Netherlands
ASML Holding NV Netherlands
ASOS PLC United Kingdom
Assa Abloy AB Sweden
Atlas Copco AB Sweden H H H H H
Atlantia SpA Italy H H H H H H H
Atos SE France
Alliance Trust PLC United Kingdom
Grupa Azoty SA Poland L L L L L L L
RTL Group SA Luxembourg L L
Aviva PLC United Kingdom H H H H
AVEVA Group PLC United Kingdom L L L L L L L L
AXA SA France H H H H H H H
Axfood AB Sweden
Azimut Holding SpA Italy L L L L L L L L
AstraZeneca PLC United Kingdom H H H H H H H H
Babcock International Group
PLC United Kingdom L L
Julius Baer Gruppe AG Switzerland
BAE Systems PLC United Kingdom
A G Barr PLC United Kingdom L L L L L L L
Balfour Beatty PLC United Kingdom
Baloise Holding AG Switzerland L L L L
Banco BPM SpA Italy L L L
Koninklijke BAM Groep NV Netherlands
Barco NV Belgium
Barclays PLC United Kingdom H H H H H H H
Barry Callebaut AG Switzerland
BASF SE Germany H H H H H H H H
British American Tobacco PLC United Kingdom H H H H H H H H
Bayer AG Germany H H H H H H
Banco Bilbao Vizcaya
Argentaria SA Spain H H H H H H
Banco Comercial Portugues
SA Portugal H H
Banque Cantonale Vaudoise Switzerland L L L L L L L
Barratt Developments P L C United Kingdom
Belimo Holding AG Switzerland L L L L L L
Befimmo SA Belgium
Beiersdorf AG Germany
NV Bekaert SA Belgium L
Beazley PLC United Kingdom L L L L L L L L
Bank Handlowy w Warszawie
SA Poland
Societe BIC SA France H H
Billerud AB (publ) Sweden H H H H H H H
BB Biotech AG Switzerland L L L L L L L L
Biomerieux SA France
Bank of Ireland Group PLC Ireland; Republic of L
Berkeley Group Holdings PLC United Kingdom
Komercni Banka as Czech Republic L L L
Bankinter SA Spain H H H
British Land Company PLC United Kingdom H
Banca Mediolanum SpA Italy
Bayerische Motoren Werke
AG Germany H H H H H H H H
BNP Paribas SA France H H H H H H H H
Brenntag SE Germany
Bunzl plc United Kingdom L L L L L L
Boliden AB Sweden H H H H H
Bollore SE France L L L L L L L
Hugo Boss AG Germany H H H H
Bouygues SA France
Bodycote PLC United Kingdom L L L
BP PLC United Kingdom H H H H H H H H
Banca Popolare Di Sondrio
SpA Italy L L L L L L L L
Burberry Group PLC United Kingdom
Basilea Pharmaceutica AG Switzerland L L L L L L
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Esg Factors Effect

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Esg Factors Effect

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Exploring the Relationship

Between ESG and Portfolio

A Study of the Russia-Ukraine War

by Saraj Huq, Erika Jutila and Oscar Sameland

Stockholm Business School

1.2 Problem Description

• Do ESG ratings of European companies have an impact on abnormal risk-adjusted

o Do ESG ratings of European companies have an impact on volatility

1.3 Aim and Contribution

The main limitations of this study are briefly discussed below:

The thesis is structured as follows:

Chapter 6 concludes the thesis.

Chapter 7 identifies and examines the limitations of the study.

• Do ESG ratings of European companies have an impact on abnormal risk-adjusted

2.2 Theoretical Framework

2.2.1 Modern Portfolio Theory (MPT)

Figure 2 The Efficient Frontier (Merton, 1972, p. 1867).

2.2.2 Efficient Market Hypothesis (EMH)

2.2.4 Fama-French Three-Factor Model (FF3FM)

𝑟𝑝 − 𝑟𝑓 = 𝛼𝑝 + 𝛽𝑝,𝑀𝐾𝑇 (𝑟𝑚 − 𝑟𝑓 ) + 𝛽𝑝,𝑆𝑀𝐵 𝑆𝑀𝐵 + 𝛽𝑝,𝐻𝑀𝐿 𝐻𝑀𝐿

The SMB factor is an attempt to incorporate a size-effect, based on empirical research,

2.2.5 Jensen’s Alpha

According to Jensen, alpha, which he introduced in 1968, is a measure of risk-adjusted returns

Figure 3: The Security Market Line.

2.2.6 Sharpe Ratio

2.3 Literature Survey

2.3.1 CSR and ESG

2.3.2 Correlation Between ESG and Portfolio Returns

Ambiguous Results or No Correlation

3.1 Problem, Purpose, and Contribution

• Do ESG ratings of European companies have an impact on abnormal risk-adjusted

o Do ESG ratings of European companies have an impact on volatility

The following hypotheses will be tested:

3.2 Scientific Perspective

3.3.1 Data Collection

Table 1: Summary of Time Periods and Sample Sizes.

Before January High ESG Fifth quintile; 9,120

December Low ESG First quintile; 9,120

During war February High ESG Fifth quintile; 1,368

During January High ESG Fifth quintile; 3,648

December Low ESG First quintile; 3,648

Refinitiv Eikon Variables

Figure 4: The calculation of pillar scores.

(Kenneth R. French Data Library, 2023)

𝑟𝑤,𝑖𝑡 = 𝑤𝑖 × (1 + 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝐽𝑎𝑛 )

𝑟𝑤,𝑖𝑡 = 𝑟𝑤,𝑖𝑡−1 × (1 + 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑡

3.3.3 Portfolio Formation

1. High ESG Before Crisis

2. Low ESG Before Crisis

3. High ESG During War

4. Low ESG During War

5. High ESG During COVID-19

6. Low ESG During COVID-19

3.3.4 Empirical Models

FF3FM (Fama & French, 1993)

𝑟𝑝 − 𝑟𝑓 = 𝛼𝑝 + 𝛽𝑝,𝑀𝐾𝑇 (𝑟𝑚 − 𝑟𝑓 ) + 𝛽𝑝,𝑆𝑀𝐵 𝑆𝑀𝐵 + 𝛽𝑝,𝐻𝑀𝐿 𝐻𝑀𝐿

3.4 Reliability and Validity

3.5 Source Critical Considerations

3.6 Research Ethical Reflections

4.1 Descriptive Statistics

Table 2: Descriptive Statistics Before Crisis.

Min -8.54% -2.97% -4.99% 0.00% -14.45% -16.37%

Max 6.70% 3.77% 6.36% 0.21% 20.40% 17.11%