This thesis aims to provide a comprehensive analysis of the connection between sustainable investing, corporate sustainability and sustainable development. Growing environmental and social concerns have increased the role of sustainability in society. Due to this development, sustainable investing has gained popularity and it has become a mainstream investment strategy for large institutional investors. Sustainable investing integrates environmental, social and governance factors into investment process aiming to improve the risk-return profile of the investment.
This thesis builds a theoretical framework to assess companies’ sustainability performance based on their ESG footprint and ESG handprint performance. Footprint refers to negative impacts and externalities caused by business activities. Handprint refers to positive impacts that companies are able to create through their core business, especially through their products and services. To my best knowledge, this study is the first one to present a framework, which separates companies’ ESG performance based on the footprint and handprint dimensions. Moreover, this thesis provides an overview of existing literature around corporate sustainability and sustainable investing.
To test empirically the framework, I obtain ESG data from Thomson Reuters and build a sample covering the years from 2003 to 2018 using stocks that are listed in the STOXX600 Europe index. By utilizing ESG scores, I create footprint and handprint scores for each company in the sample to assess stock market performance based on these scores. I utilize a portfolio study methodology and Fama-French three-factor model to analyze whether ESG data provides value relevant information for investors. I create four portfolios by classifying stocks based on their footprint and handprint scores. I find that portfolio including stocks with high ESG footprint score and low ESG handprint score creates excess returns of 0.387% at 1% level. Other three portfolios create also a positive but insignificant excess returns. This signals that investors receive value relevant information by utilizing especially ESG data considering stocks’ ESG footprint performance. Moreover, I found that those stocks that have improved their ESG ratings during the past 12-months outperform the market. High-ESG portfolios create excess returns of around 0,5% at 1% level, and this finding holds whether using ESG total scores, ESG footprint scores or ESG handprint scores
