Reumo
In recent years, Environmental, Social, and Governance (ESG) factors have gained significant attention in finance, particularly in the context of investment decision-making, portfolio management and policy shaping (Galletta et al, 2022). As global awareness of sustainability challenges grows, investors are increasingly integrating ESG considerations into their strategies, seeking not only financial returns but also positive societal impact, or, trying to link ESG assets characteristics to their own expectations. The concept of ESG investing has evolved beyond mere ethical considerations to encompass a strategic approach aimed at enhancing long-term financial resilience and sustainable growth (Want et al, 2022). By evaluating companies based on their ESG practices, investors aim to identify firms better equipped to deal with emerging challenges, such as climate change regulations, social inequality, and governance failures This proactive stance not only mitigates risks associated with regulatory changes and reputational harm but also positions investors to capitalize on opportunities arising from shifting consumer preferences and regulatory incentives favoring sustainable business practices (Shi et al, 2022). The Brazilian market presents an environment to develop these studies. This paper contributes to the existing literature by providing empirical evidence on the impact of ESG factors on financial markets within the Brazilian context. Specifically, it explores how firms’ ESG scores, derived from comprehensive data on environmental impact, social policies, and governance practices, correlate with their market performance and risk profiles. By leveraging a dataset encompassing diverse sectors and ESG metrics, this research aims to inform investors, policymakers, and corporate leaders about the implications of ESG integration for market dynamics and investor decision. Works analyzing the relationship between investment metrics and ESG practices are already well established in the field of finance. Besides professional attention, we can see the proliferation of studies testing factors to explain returns, the factor zoo discussed by Cochrane (2011) goes on many paths. One of them comprises factors related to environmental, social and governance practices (Hua Fan and Michalski, 2020). Song et al. (2023), find that investor attention and analyst coverage help firms protect themselves from crash risk. This research analyses Brazilian firms’ characteristics and its assets capital market behavior. We collected data available in Refinitiv Eikon database with regards to firm level characteristics related to environmental, social and governance practices. We also collected market data from the same source for returns and volatility. We conduct the ordinary least squares regression to analyze cross-sectional data. Exploratory regressions found no significant relationship between Returns and ESG Score. On the other hand, regressing Volatility against ESG Score we found negative and significant relationship at 5% level. These initial results suggest no potential impact to returns in adhering to green, social and governance practices. On the other hand, we may say that firms with higher ESG Scores have lower risk. Notably, the ESG Controversies Score (ECSC) shows negative correlations with most other scores, suggesting that companies with higher controversies tend to have lower ESG ratings. The work provides insights into the relationships among various environmental, social, and governance (ESG) scores and related metrics. Positive correlations are observed between the ESG Score and its components, such as Environmental (EPS), Social (SPS), and Governance (GPS) Pillar Scores, indicating that companies performing well in one ESG aspect tend to perform well in others. Notably, the ESG Controversies Score (ECSC) shows negative correlations with most other scores, suggesting that companies with higher controversies tend to have lower ESG ratings across other dimensions. The Renewable Energy Use Ratio (REUR) and its score (REURS) exhibit moderate positive correlations, highlighting the link between renewable energy usage and sustainability performance. Overall, the matrix underscores interdependencies and patterns within the ESG metrics. In conclusion, this study provides insights into the integration of Environmental, Social, and Governance (ESG) factors within investment strategies in the Brazilian market. The findings reveal a nuanced relationship between ESG scores and financial outcomes, reflecting both challenges and opportunities for investors. While the direct impact on stock returns shows variability across sectors and time periods, the consistent negative association between ESG scores and stock volatility suggests that companies with higher ESG ratings tend to exhibit lower risk profiles. This correlation underscores the potential for ESG considerations to contribute to long-term financial stability and resilience. Moreover, the study underscores the dual role of ESG criteria, not only as ethical imperatives but also as indicators of operational efficiency and risk management practices that can mitigate volatility and enhance shareholder value over time. Moving forward, further research could explore sector-specific impacts and the evolution of ESG metrics over extended investment horizons to refine strategies that align financial objectives with sustainable development goals. Key findings from this study include: (i) firms with higher ESG ratings tend to exhibit lower stock volatility, indicating potential risk mitigation benefits for investors; (ii) companies involved in more ESG controversies tend to have lower ESG ratings across ESG dimensions in general and in sub scores; (iii) ESG factors have potential to enhance long-term shareholder value. These findings may help investors, banks and policymakers adjust their procedures to consider the implications of ESG adoption in firms’ performance.