Are Investors Being Misled? Testing for Bubble Behavior in ESG Scores

Abstract

In recent years, environmental and social sustainability, supported by strong corporate governance, appears to have been reshaping behaviors of firms, investors, and consumers. The growing public interest in these issues raises questions regarding the extent to which disclosed information and sustainability ratings accurately reflect reality. The primary objective of this study is to empirically investigate whether environmental, social, and governance (ESG) scores have been overvalued over time at a level that may potentially mislead investor behavior. In this context, the study analyzes the presence of speculative bubble behavior in the ESG scores of G-7 countries (United Kingdom, France, Japan, United States, Italy, and Germany) over the period from February 28, 2018 to December 30, 2022, utilizing the Generalized Sup ADF (GSADF) test developed by Phillips et al. (2015). The findings indicate that, despite periodic fluctuations, ESG scores do not generally exhibit bubble behavior. A sharp decline was observed across all countries on March 31, 2020, which is considered to be associated with the World Health Organization's declaration of COVID-19 as a global pandemic on March 11, 2020. Furthermore, the results suggest a high degree of synchronization in ESG score movements among G-7 countries.