Doing Good and Doing Well: The Relationships between ESG and Stock Returns of REITs

The study empirically tests the effects of ESG ratings on the REIT stock performance and how climate change salience risk could have a differential impact on ESG-rated and non-ESG-rated REITs. Using a sample of 413 REITs from both the US and other developed countries covering the period from 2018 to 2022, the empirical tests present several key findings that explain how ESG factors impact REIT stock performance. The results show that the ESG factor is negatively correlated with REIT stock returns, or more specifically, REITs with an ESG rating have a lower price return of 0.8% relative to REITs not assessed for ESG. The results hold when different ESG measures are used. On the pricing of ESG risk factors using the CAPM models, the results show differential excess market risk premia for ESG-rated REITs but with a negative sign. ESG-rated REITs have lower premia on excess market risks. Contrary to the green risk premium hypothesis, lower ESG-rated REIT stock performance may not be due to higher risk premiums from stock markets but rather from higher compensation for the Board and Senior Management of REITs with active ESG agendas.

Keywords: Environmental, Social and Governance (ESG), REITs, Capital Asset Pricing Model (CAPM), Climate Change Risk
JEL Classification: G3, R3