Resumo

In recent years, Environmental, Social, and Governance (ESG) factors have gained significant attention in the area of 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 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. Table 1 lists the ESG variables employed in this study and their description provided in Eikon (Group, 2023). 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.

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.

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