PurposeThe growth of socially responsible assets has been exponential over the last decade, they now account for almost a third of professional investments. As the growth persists, faith and conviction investors reshape the equity markets. To fully comprehend the impact of socially conscious participants on security returns, this paper attempts to provide insights on how responsible investment growth has impacted the returns of sustainable stocks. The examination is split by investment horizon to account for short and long effects.Design/methodology/approachUsing an exclusive dataset of non-financial ratings, provided by MSCI ESG research, the authors examine the cross-sectional returns of US and European sustainability-leading and lagging corporations between 2007 and 2019. Panel models robust to country, firm-year and industry effects were then employed to examine the impact of responsible investment growth on future stock returns.FindingsThe authors find evidence that the impact of responsible investment growth is dual contingent upon the timeframe considered. In the short run, sustainability-leading and lagging firms display similar stock returns. However, the spread in returns is negative over long horizons and increasing over time.Originality/valueThe examination performed in this study highlights the significant effect of responsible investment growth on future stock returns. Overall, the authors’ findings are consistent with the price pressure hypothesis in the short run and the cost of capital alteration over longer horizons.

Using an international sample of environmental and social firm-level ratings between 2007 and 2019, we form synthetic overlapping region-based equity portfolios to examine the impact of screening stringency on abnormal returns and specific risk. While previous literature analyzes this relationship in a bidimensional setting, inferences made in this study are additionally robust to regional levels of market efficiency. Our results suggest that (1) screening stringency displays an inverted curvilinear relationship with risk-adjusted returns and (2) the impact on specific risk is strictly increasing. Thus, portfolios that employ marginal and substantial screening incur the cost of responsible investing. However, moderate screening has the benefit of increasing performance without the burden of financing the least responsible corporations.

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Using an extensive sample of environmental, social, and governance (ESG) ratings, we reexamine the corporate social responsibility (CSR) factor premium in the developed equity markets between 2007 and 2019 and show that its extent is contingent upon size effects. Consistent with the novel market equilibrium, we contend that the exponential growth of socially responsible investment (SRI) has rendered the risk-adjusted returns of large CSR-leading firms in line with or even below their lagging counterparts. In line with the neglected effect, greater market segmentation, lower market efficiency, and lower investor awareness of CSR enable us to observe the former market equilibrium in the smaller corporation partition, where CSR-lagging firms exhibit lower returns than leading ones. We thus theorize a two-stage CSP–CFP relationship, where size effects are considered a relevant moderator. This contention is robust to portfolio and panel regression settings. However, our partly contradicting results with the existent literature emphasize the divergence in ESG ratings across rating agencies. JEL Classification M14; G11; G15