Wharton Pension Research Council Working Papers

Document Type

Working Paper

Date of this Version



Using long-standing models for expected returns of US equities, we show that firm environmental ratings interact with those forecasted returns and produce excess returns both unconditionally and conditionally. Well-known factor models subsume neither environmental-related return differentials nor expected return premia from those scores and models. In addition, combining information from both inputs—expected return models and economic, social, and governance (ESG) information—may provide an advantage in selecting investments. For financial fiduciaries, this notion shifts the conversation about ESG reflecting only constraints to one of an expanded information and possibly investment opportunity set.


ESG, sustainability, expected returns, factor models, earnings forecasts, fiduciary responsibility

JEL Code

G11, G12, G17, Q56, C58

Working Paper Number


Copyright/Permission Statement

All findings, interpretations, and conclusions of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council. © 2021 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


The authors thank Alimu Abudu, Peter Cachion, Nancy Gao, Troy Wang, and Evan Xu for computational and outstanding research assistance. We also thank the MSCI KLD and Wharton WRDS.

Included in

Economics Commons



Date Posted: 11 August 2021