How ESG directly and indirectly affects the financial

performance of real estate companies?

M.J.M. Meulenberg1
MSc. Finance
University of Groningen
Faculty of Economics & Business
Supervisors: dr. A. Plantinga & dr. G. Alserda

Abstract:
In this study I examine the relation between Environmental, Social and Governance (ESG)- and
financial performance for public listed real estate companies in the period 2009 until 2019. I
use two analyses to study the dynamics of direct and indirect effects of the ESG-financial
performance relation for real estate specifically. First, I asses whether best-in-class ESG
portfolios are able to generate excess returns. Second, I propose operational performance as a
mediator between ESG and financial performance. The results show that best-in-class ESG
portfolios are unable to generate excess returns. I also document that best-in-class ESG
portfolios are less sensitive to the market and engage more in aggressive investments. The
second analysis documents significant mediation of operational performance. However, this
effect is largely offset by the direct effect between ESG and financial performance. Because
ESG scores are widely observable I conjecture that the effect of ESG on operational
performance is already incorporated in the stock price.

JEL classification: G51, M14, D92

Keywords: ESG, real estate firms, financial performance, mediation and operational
performance

1
Student number: S2738570 Contact: m.j.m.meulenberg@student.rug.nl
1. Introduction
In 2017, about 47% of all global listed real estate investment is owned by institutional
investors. Of the global institutional assets base, around 50% is managed by integrating
Environmental, Social and Governance (ESG) policies.2 Considering the scale of investments
that integrate ESG policies, I study the financial performance of listed real estate companies
by including real estate operating firms, real estate developing firms, real estate management
firms and Real Estate Investment Trusts (=REITs) that have an active ESG strategy. To
further advance our understanding of this relationship, I explore the effect ESG on financial
performance through operational performance.
ESG are the three factors used to assess the sustainable and ethical impact of an investment in
a business or company. Worldwide, investors are increasingly incorporating ESG policies in
their investment decisions. A typical example of such an application could be a best-in-class
investing strategy, by which investors only focus their attention on the top 25% or top 10% of
the stocks in terms of ESG (Kempf & Osthoff, 2007). Empirical research regarding the effect
of ESG on financial performance remains inconclusive (McWilliams & Siegel, 2002;
Cappelle-Blancard & Monjon, 2012). Most of this research investigates the effect of ESG on
financial performance by using industry wide samples (Friede et al., 2015). Which is
surprising, given that this research finds significant differences across industries for the effect
of ESG on financial performance (e.g., Waddock and Graves 1997; McWilliams and Siegel
2001; Fisman et al., 2005). According to Griffin & Mahon (1997) Multi-sector studies
conceal industry specific effects. Subsequently, Chand (2006) suggests that studies analysing
the link of ESG and financial performance should focus on a single industry. Therefore, I
solely focus on analysing the relationship between ESG and financial performance for the real
estate sector. ESG related investments are especially relevant in the real estate sector as real
estate operations are responsible for 40% of global greenhouse gas emission. In addition to
that, they are responsible for over 60% of the global usage of wood and adding to this3. As
such, studies find that buildings with high efficiency ratings and better governance result in
higher rents, higher premiums paid for the building, lower occupancy rates, and lower cost of
capital (Eichholtz et. al, 2010; Fuerst & McAllister, 2011). Additionally, both ESG and the
real estate sector focuses on long-term operations that may imply better results of ESG on

2
Source: LaSalle Investment Management, ‘’Global Real Estate Universe 2017’’
3
See, The Energy Information Agency, EIA, http://www.eia.gov.

2
financial performance. However, current research either focuses on building level data or uses
financial performance measures such as ROA and Tobin’s Q (Cajias et al., 2014; Eicholtz et
al., 2013; Fuerst and Mcallister 2011). To extend the generalizability and increase the chance
of promising findings (Friede, Busch & Bassen, 2015) I study the financial implications by
focusing on stock performance which leaves the follow research question:

Do real estate companies with high ESG ratings generate excess returns?

However, most public investors are not fully informed about the ESG activities of a real estate
company as this information is often not accessible, intangible and unstructured (Fiori et. Al,
2007). Therefore, Cai et. Al (2012) models the operational performance to assess the captured
resources obtained by engaging in an active ESG strategy, for which they used cash flow from
operating activities as a proxy for operational performance. In contrast with stock
performance, operating performance of real estate companies displays the interplay in cost
and benefits for ESG. Analysing this interplay provides more insight in how the cost and
benefit analysis of ESG on real estate is established. To date, no study has assessed the
indirect relation of ESG on financial performance through operational performance in the real
estate sector specifically. Therefore, to advance understanding the relationship between ESG
and financial performance I do not only examine the direct relationship between financial
performance and ESG but also investigate whether operational performance incorporates all
or some effects that are eventually captured by financial performance. Accordingly, I propose
the following research question:

Does operational performance mediate the relation of ESG and financial performance in the
real estate sector?

To conduct this research, I construct a dataset of public listed real estate companies
worldwide over the period 2009-2019. For the first research question I assess monthly excess
returns of real estate portfolios ranked on ESG scores obtained from ASSET4. The ESG
scores are equally weighted and standardized which makes quantifiable analysis of portfolio
returns possible. For this research question I construct best- and worst-in-class ESG
portfolios. I estimate the Fama & French 5 factor to adjust for risk which enables us to study
whether alpha is generated (Fama & French, 2015).
For the second research question I check whether operational performance mediates the ESG-

3
financial performance relation. I use a structural equation modelling approach as proposed by
the theory of mediation found by Baron and Kenny (1986).
The remainder of this paper is organized as follows, the next section covers the literature on
the effect of ESG on financial performance, the relation ESG-financial performance for real
estate specifically and the relation of operational performance and ESG. The third section
describes the construct of ESG portfolios and model of the mediation of operational
performance in the ESG-financial performance relation. The fourth section describes the
ESG- and financial data. The final section describes the results and conclusion.

2. Literature Review

2.1 ESG and financial performance

In the early written literature, ESG had been labelled as a lead indicator for companies to
generate deadweight losses and underperformance (Friedman, 1970). However, these early
studies that focus on the question whether ESG could predict financial performance are based
on weak theoretical foundations, inconsistent and inadequate measurement of ESG, weak
methodology, and sampling problems (Ruf et al., 2001). Furthermore, Van Beurden and
Gossling (2008) find that earlier studies on the relationship between ESG and financial
performance incorporate too many interpretations of the period between 1970-1990, where
ESG had low socio political value.
The incorporation of ESG, however, has become increasingly important for businesses over
the past 2 decades. More than 50% of the global institutions now integrate ESG in their
investment decisions (Kivits; Furneaux, 2013). This development clearly shows the salience
of companies engaging in investments that are in accordance with ESG guidelines (Friede,
Busch & Bassen, 2015). The integration of ESG policies in business models is also due to
outside pressure. Eminent indices such as the S&P ESG indices, DJ Sustainability World
Composite, or MSCI World ESG index monitor on the three different dimensions of ESG
what encourages firms to integrate ESG in their business strategy. Ioana & Adriana (2013)
find that around 80% of the 2200 largest corporations integrate ESG reporting in their annual
report.
As a result, more recent studies provide evidence on the importance of ESG integration into
corporate strategy in terms of financial value. For instance, Schaltegger and Wagner (2006)
find that pollution is often associated with a waste of resources, and the stricter the legislation

4
of environmental policies the more this increases the incentive to innovate. These innovations
could ultimately lead to offsetting the costs of complying with environmental regulations. In
addition to that, a strategy dedicated towards ESG could also result in greater loyalty of
employees, customers, and local communities (Ribstein, 2005). Hence, lead to higher
financial performance in terms of stock returns. Woods & Urwin (2010) also stress that the
reputational aspect is one of the main reasons for integrating ESG in the business model. The
reputational aspect of ESG is one of the main drivers for higher stock prices. The reputational
value does not have any financial value on itself, but good reputation can be transformed into
higher sales and eventually impact financial value. Otherwise the impact of ESG remains
intangible. The reputational segment of investing is high on the agenda of institutional
investors. Mostly pension funds engage in ESG related investments taking into account the
social responsible investment policy that is in line with pension fund investments, hence,
leading to a higher stock price for high ESG rated stocks (Lougee & Wallace, 2008).

2.2 Real estate and ESG

The real estate sector worldwide is accountable for 42% of the energy consumption (UNEP,
2016). There is an increasing demand for sustainability improvements by tenants, regulators,
and investors in real estate. With respect to investors, this is especially the case for
institutional investors (Petersen & Vredenburg, 2009). Managing assets that are in conformity
with an active ESG strategy is a priority on the agenda of institutional investors. Hence, it is
important for the real estate industry to adapt, given the fact that the major shareholders in
publicly traded real estate firms are institutional investors. As a result, the adaption in
strategically managing ESG guidelines in real estate companies is increasing.
Pivo (2008) surveys almost 200 CEO’s of listed real estate companies. The result shows that
the strongest drivers are: risk and return, outperformance and moral responsibility.
Interestingly, the literature assessing the link between ESG and financial performance for real
estate companies is rather scarce. Nevertheless, several studies investigate the link for the real
estate.
For instance, Cajias et al. (2011) find an increase in strength in ESG related activities among
European listed real estate companies from 2000 till 2010, with REITS in particular.
Furthermore, they find evidence that ex ante, ESG activities are rewarded by a decrease in
idiosyncratic risk. Consequently, listed real estate companies could exploit benefits
structuring ESG activities in such a way that signals their efforts to capital markets.
Additionally, Ferreira and Laux (2007) find evidence of the negative relation between

5
governance and idiosyncratic risk. Furthermore, it triggers the information about the of
expected cash flows.
McGrath (2013) studies the ESG and financial performance relationship for buildings
specifically. Results show that eco-certified properties have a lower excess capitalization rate
than their non-eco counter properties. However, these results only find support by the energy
star rating for buildings. For another rating, the so called LEED rating, results were much less
conclusive. Both LEED certification and star rating are labels granted for energy efficient and
sustainable buildings. The results for LEED ratings are not significant but do show a higher
capitalization rate. This concludes that there are notable differences in pay-off between
different sustainable certifications for buildings. In addition to that, it clearly shows the lack
of consistency in results by not using standardized scores for ESG. Another study that uses
LEED as an active ESG strategy proxy is by Sah et al. (2013). The authors differentiate
between green REITs and non green REITs. The amount of buildings in the REIT portfolio
that participate in the LEED program proxies the ESG activities and regarded as green REITs.
They find that green REITs generate higher financial performance in terms of Tobin’s Q and
ROA. Contrary to this finding, Mariana et al. (2018) report that the percentage of green
certified buildings in a portfolio has a negative impact on the ROA, ROE and the alpha of
stocks. According to the authors, this is due to incremental capital expenditures in order to
receive LEED or energy star certification.
Because of these inconclusive findings, it is essential to further analyze whether ESG policies
have an impact on the financial performance of a real estate company. The majority of
existing research focuses on property level and lacks control variables, which are likely to
interfere with the reliability of the findings. Furthermore, most studies employ a sample of
U.S. real estate companies and use different proxies for financial performance (Dermisi 2009;
Eicholtz et al. 2013; Fuerst and Mcallister 2011; Riechardt et al. 2012).
As such, it is interesting to gain more insight into the ESG financial performance link on a
transcontinental level. It is important to examine the dynamics of interference of returns in-
between continents and countries. For instance, Australia, where sustainability has been an
important focus for property investors. Before the 2008 economic meltdown; in Sydney a
building that did not receive an eco-label is regarded as obsolete (Matthiessen and Morris,
2007). Furthermore, the existing studies only examine the effect of ESG by taking green
certifications on individual buildings to proxy ESG. Therefore, an Index based approach of
ESG analysis is necessary as it offers consistency, transparency, and replicability (Blank et
al., 2016).

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2.3 Operational performance and ESG
Scholars find the effect of a positive relation between ESG and financial performance to be
spuriously defined due to failure of identifying mediating effects of possible intangible
resources (Surroca, et. Al, 2010). Various economists therefore stress the importance of
operational performance, which entails the cash flows from operating activities, as it could
provide the measurable missing link for the relation between ESG and financial performance
(Caijas et al., 2011; Eicholtz et al., 2012).
First of all, a major aspect of making adjustments in firm structure towards a more active ESG
strategy is the shift towards a longer term commitment in multiple areas, such as: stakeholder
interests, sustainable development and the conditions regarding society. Studies establishing
the long-term advantages of ESG investing find the positive effect on retaining employees
(Suspanti et. Al, 2015). According to human capital theory, that suggests that when
employees would resign, a degree in knowledge embodied in labour productivity would be
lost (Nafukho et al., 2004). Hence, this impacts operational performance of a company in
multiple ways, such as loss of human capital and an increase in training costs for employees.
Previous research on this subject matter indicates that ESG could increase the employee trust
(Hansen et al., 2011). The increase in trust positively affects employee relationships, ESG
therefore positively affects the social and human capital of the company. Eventually this
process results in a significant increase of organizational effectiveness and efficiency that
helps maintain the production capabilities at a high level (Holtom et al., 2008). Bauer et al.
(2011) were among the first to study the relation between operational and environmental
performance for listed real estate companies. Although there is a lack of causality, missing
relevant control variables and a short time span, the relation still shows a positive and
significant effect. The effect, however, is only positive for real estate firms that operate in the
office industry, whereas the residence sector performed relatively worse on environmental
performance.
Another reason why ESG may impact financial performance through operational performance
is by improving energy efficiency and the appliances installed in buildings that could
ultimately offset energy demand by 85% by 2030. The efficient use of energy in real estate
appears to positively affect the net present value of investments in these green buildings
(Stephenson, 2007). For example, one of the largest U.K. property investors, Hermes,
integrated ESG in their business model. Consequently, reducing its energy usage with 15%
and in addition to that water usage reduced by 18%. This resulted in a substantial reduction of

7
energy costs and, in turn, a higher operational performance. Therefore, I propose that the
effect of ESG on financial performance is mediated by operational performance.

3. Methodology
To assess the effect of ESG on financial performance, I perform two types of analysis. First, I
construct portfolios based on best-in-class and worst-in-class investing regarding ESG and
asses compare their financial performance. Second, I examine whether operational
performance mediates the performance between ESG and financial performance following the
mediation approach of Baron and Kenny (1986). Consequently, in the first analyse I analyse
the direct effect and in the second analysis I determine the presence of an indirect effect.

3.1.1 Formation of ESG portfolios

Portfolio construction provides straightforward insights in how ESG scores in Real estate
companies can be categorized (see also Wimmer, 2012). Hence, market value weighted
portfolios are segmented into best-in-class and worst-in-class ESG scores. Thomson Reuters
assigns ESG ratings at the end of each fiscal year. To be certain that either the ESG as well as
the financial information is available, portfolios are constructed at beginning of July (𝑡) and
hold for twelve month’s to the end June (𝑡 $% ) next year. The best- and worst-in-class
portfolios contain a 25% best- and worst level filtered on the basis of ESG scores. These
portfolios are named 𝐸𝑆𝐺%) and 𝐸𝑆𝐺*%) respectively. In addition to that, a 10% best- and
worst in class portfolio is constructed named 𝐸𝑆𝐺$+ and 𝐸𝑆𝐺*$+ . In addition to the 4
portfolios, the total sample of real estate companies is included, ESG100 respectively. The
ESG100 acts as a benchmark comparison for the other portfolios. This leads to time series of
monthly returns for the years 2009 till 2019. Depending on the applicable relative % level
more real estate firms are added to the portfolios on an annual basis since more firms in the
sample obtain ESG ratings later in the time span. The score of the threshold ESG determines
the yearly rebalancing of the portfolios. Where the threshold is based on a relative %
distribution of the ESG score, depending on the 25% and 10% level. Furthermore, in
comparable studies there is a usage of criterion based on so called sin stocks (Lee et al.,
2013). Which rules out stocks that operate in controversial business areas. In this study I
solely focus on the real estate sector hence, there is no industry sector bias.

8
3.1.2 Performance measurement of portfolios
The monthly excess returns of the portfolios are assessed using the Fama & French five
Factor Model (Fama & French, 2015). It controls for the 5 different factors that cover size,
value, profitability and investment patterns:

𝑅./ − 𝑅1/ = 𝛼. + 𝛽+. 𝑅67 − 𝑅17 + 𝛽$. 𝑆𝑀𝐵/ + 𝛽%. 𝐻𝑀𝐿/ + 𝛽<. 𝑅𝑀𝑊/ + 𝛽>. 𝐶𝑀𝐴/ + 𝜀./ (1)

where 𝑅./ is the return on portfolio i in month t and 𝑅1/ risk free rate from the Fama &
French website at month t. The dependent variable in the model is the monthly portfolio
returns 𝑅./ in excess of the risk free rate 𝑅1/ . 𝑅67 is the monthly return of the MSCI world
real estate index in month t. The HML covers the difference in return between a low and high
book-to-market portfolio in month t. The SMB factor denotes the difference in return between
small size and large size portfolios based on market capitalization in month t. The RMW
factor denotes the difference between portfolios that are highly profitable minus portfolios
that are weakly profitable in month t. At last the CMA factor denotes the difference between
conservative and aggressive investment portfolios in month t. The purpose of this model is to
specifically find outperformance that is adjusted for market risk and potential outperformance
due to size, value, profitability and degree of investments. Consequently, this enables to study
the link between the adjusted alpha and ESG.
Furthermore, according to Bauer et al. (2005) portfolios filtered on high ESG scores differ
substantially from their conventional counterparts. Hence, it is relevant to asses any statistical
differences in alpha between high and low rated ESG portfolios. Therefore, I test the excess
returns on differenced portfolios (Derwall et al., 2005):

𝑅./C − 𝑅./* = 𝛼. + 𝛽+. 𝑅67 − 𝑅17 + 𝛽$. 𝑆𝑀𝐵/ + 𝛽%. 𝐻𝑀𝐿/ + 𝛽<. 𝑅𝑀𝑊/ + 𝛽>. 𝐶𝑀𝐴/ + 𝜀./ (2)

where 𝑅./C is the excess return of the high rated ESG portfolio and 𝑅./* is the excess return of
the low rated ESG portfolio. The independent variables in model (2) are similar to the ones in
model (1). Except for the constant term 𝛼. , that now captures the differenced alpha between
high and low rated portfolios. The differenced portfolio for the 25% and 10% class are ESG∆25
and ESG∆10 respectively.

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3.2 Robustness

3.2.1 Different benchmark

According to Löffler & Rapuach (2011) different systematic risk exposures can increase the
generalizability of results. Therefore, as robustness a different market index, the ENGX is
applied in the Fama & French 5 factor model. The ENGX exclusively contains REITS
operating worldwide. However, Table I suggests a high correlation between the two market
indexes and the regression results are therefore refrained and stored in the appendix.

Table I: Matrix of correlations

Variables (1) (2)

(1) MSCI 1.000
(2) ENGX 0.946 1.000

Notes: This table displays the correlation between the two market indexes over the period 2009-2019.
Both the market indexes function to asses the market risk premium of the Fama & French 5 factor model.

3.2.2 Post financial crisis period

The results of the portfolio might lack consistency in terms of affection by the financial crisis
in 2008. Therefore, market sentiment might bias the financial returns and ESG might not be
valued correctly. According to D. Rommer (2014) global financial markets had affected
equity markets until the end of year 2012. This would lead to inconsistency in results because
of a potential structural break in the data. Therefore, a separate analysis for post financial
crisis returns provides more conclusive results. The time period covers the period from the
beginning of 2013 till 2019.

3.3 Mediating effects

In this section I examine whether ESG causes financial performance indirectly by operational
performance. Figure I graphically displays the mediation analysis of this study. The graph
shows operational performance as the mediating variable, financial performance as the
dependent variable and ESG as the independent variable. Effect A multiplied by B is the
indirect effect and effect C is the direct effect.

10
Figure I: The relationship between ESG, financial performance and operational performance

Operational
performance
(OPER)

Financial
ESG
C performance
(ESG)
(RET)

Figure I: graphically shows the model for mediation analysis. The indirect effect is the product of effect A and B and the direct effect is
effect C. Although, one must bear in mind that for ease of interpretation the control variables refrain from the figure. Only the independent
variable, mediator and dependent variable are displayed.

Baron and Kenny (1986) state three necessary conditions that require for mediation to be
present. First, the mediating variable must be significantly related to the independent variable.
Second, the mediating variable must be significantly related to the dependent variable. Third,
the dependent variable must be significantly related to the independent variable or diminishes
the effect when the mediator variable is controlled for. However, the established effect
between the independent and dependent variable in mediation might be misleading.
According to (Zhao, 2010) this would represent the sum of the total effect, thus, including
indirect and direct effects. Where in mediation the main focus is on measuring the indirect
effect. Therefore, the regression of the independent variable on the dependent variable is
refrained.
To establish a causal relationship with mediation one has to control for multiple variables that
might lead to confounding the relationship between ESG performance and financial
performance (Baron & Kenny, 1986). First, firm size, since previous research indicates that
larger firms receive more media attention and are therefore more prone to disclosing ESG
reporting (Albers and Guenther, 2010). Moreover, larger firms are more likely to positively
engage in shareholder activities (Dimson, Karakas & Li, 2015). Second, it is relevant to
control the amount of leverage the firm has. The proxy is used to assess the risk tolerance that
affects the priorities or tolerance towards ESG activities (Waddock & Grave, 1997). Third, an
important variable to control for, especially for the valuation of real estate companies, is the
amount of liquidity. Given the illiquid investments necessary for real estate investors a certain

11
threshold of liquidity is necessary to ensure pay offs to investors (Eichoholtz, 2001). Forth,
dividend yield is included to assess possible investment opportunities (Wahba, 2010).
Consequently, the following models are formed:

𝑂𝑃𝐸𝑅./ = 𝑎 + 𝛽$ 𝐸𝑆𝐺./*$ + 𝛽% 𝑆𝐼𝑍./ + 𝛽< 𝐿𝐸𝑉./ + 𝛽> 𝐿𝐼𝑄./ + 𝛽) 𝐷𝐼𝑉./ +𝜀./ (3)
𝑅𝐸𝑇./ = 𝑎 + 𝛽X 𝑂𝑃𝐸𝑅./ + 𝛽Y 𝐸𝑆𝐺./*$ + 𝛽Z 𝑆𝐼𝑍./ + 𝛽[ 𝐿𝐸𝑉./ + 𝛽$+ 𝐿𝐼𝑄./ + 𝛽$$ 𝐷𝐼𝑉./ + 𝜀./ (4)

Where the subscripts t is the year and i the firm number. OPER refers to the operational
performance measured by cash flows from operating activities divided by the total assets.
ESG is the ESG rating from ASSET4. SIZ refers to the size of the company measured by
taking the logarithm of the total assets. LIQ refers to liquidity and is measured by total cash
divided by total assets (John, 1993). DIV is the dividend yield and RET is the yearly % change
in the return index. At last 𝜀 captures the disturbance of the regression. For visual
interpretation of the metrics used in the mediation model see Table II.
I use structural equation modelling to make statistical interference in the model. Structural
equation modelling uses a conceptual model, path diagram and system of linked regressions
within observed and unobserved variables. SEM is fundamentally different from a normal
regression where in normal regression there exists a clear distinction between dependent and
independent variables. As opposed to SEM where dependent variables in one model can
become independent variables. Furthermore, the SEM framework in mediation analysis is
justified when extending the model to multiple independent variables (Gunzler, 2013). At last
one of the assumptions for mediation by the Baron & Kenny approach is that the error terms
in the different models need to be uncorrelated. As opposed to SEM where this assumption is
less strict. Hence, this generates a higher power for mediation. A potential limitation in the
regression between ESG and operational performance can be reverse causality. However,
Giese (2019) finds that causality goes from ESG to firm performance. Therefore, exogeinity is
more tenable in the model.
Table II: Description of variables used in mediation procedure
Name Computation
ESG-1 1 year lagged ESG score
SIZ Logarithm of Total Assets
LEV Total Debt divided by Total Assets

LIQ Total Cash divided by total Assets

RET Yearly % change of the return index
DIV Yearly Dividend Yield

OPER Cash flow from operating activities divided

by Total Assets

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4. Data input/availability

4.1 ESG Ratings

The ESG data is obtained from the ASSET4 database. ASSET4 rates and collects ESG data
on individual companies since 2002. More than 600 data points for each individual company,
a labour intensive process that requires a single analyst a week for each individual company.
All the data used to determine the ESG score is by screening exclusively objective and
publically available data. For instance, the annual reports, stock exchange filings and NGO
websites. The data is converted of key performance indicators and combined into eighteen
category scores. Each of the eighteen levels is rated a score between 0 and 1 whereas a high
score would indicate high performance on this measure and low vice versa. Ultimately, the 3
pillars environment, social and governance converge at an equally weighted basis and the
integrated rating is obtained. The integrated equal weighted ESG scores range from 0-100 and
follows the same screening as the 18 categories where a high number would indicate a high
level of performance. Other data sources that report ESG scores such as Sustainalytics,
GRESB (Global real estate sustainability benchmark) and MSCI ESG have been deliberated
and analysed but were either lacking on reporting’s for listed real estate companies or covered
a short time span. The major advantage of the usage of ASSET4 for research purposes is the
computation of the equal weighing of all three pillars. This gives an unbiased standardized
measure of the results when taking ESG as a whole. This standardized score allows for
quantitative analysis of social responsible investments (Ribando & Bonne, 2010). The three
different ESG components might have distinctive effects varying between different firms. For
instance, the environmental component might be more relevant when analysing an
agricultural firm. Though the different components have different impact they are all relevant
since all three components are inextricably linked (Blank et al., 2016).

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4.2 Financial and accounting data
Financial and accounting data are obtained from Datastream. The steps conducted to
constitute the dataset necessary are as follows: I collected the ISIN’s of all the ESG dataset
providers that covered real estate companies worldwide and pooled them together. ESG rating
providers from MSCI ESG, Sustainalytics and GRESB. As such, I collected the ISIN’s of
each individual firm summing up to around 3000 real estate firms. The real estate firms
consist of REITs, real estate operating companies, real estate developing companies and real
estate management firms. Real estate service firms are excluded from the dataset because real
estate service firms do not generate income that is affiliated with real estate (Lindholm, 2006).
This paper only studies listed firms because the research is oriented on stocks that are freely
tradable. However more than half of the companies are not publically listed and therefore
removed. The remaining number of firms are presented in Graph I. From the graph we see a
steady increase of firms that receive ESG ratings. However, a drop of availability in 2018
indicates that some firms had not received ESG ratings yet by the beginning of June 2018.

Graph I: Total amount of companies with ESG rating

600

500

400

300

200

100

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Notes: this table shows the total sample of real estate companies that retrieved an ESG rating from 2009-2018. Note that the ESG25, ESG-25,
ESG10 and ESG-10 are constructed based on this sample.

As already mentioned the objective is to collect a sample that covers real estate companies
worldwide. However, most companies that are operating in the real estate business and
denoted on a stock exchange are operating in developed countries. The distribution of the
countries covered is visible in Graph II.

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Graph II: Distribution of countries for the covered real estate companies

Brazil Singapore Cayman Islands Japan Hong Kong

Canada Australia United Kingdom rest of the world United States

Notes: graph 1 displays the distribution of countries of which the total sample of real estate stocks is made of. The whole period of 2009 till
2019 is covered in this distribution. Countries with less than 0.5% share are added to the rest of the world section.

The financial and accounting obtained from Datastream includes data on market
capitalization, total assets, cash flow from operating activities, return indexes, total debt, total
cash and dividend yields. The Fama & French factors are downloaded from the Fama French
website. The monthly return indexes and Fama & French factors are downloaded from the
beginning of each month. The factors of Fama & French are the 5 factor developed index
which is justified as Graph II indicates the high frequency of developed countries.

4.3 Descriptive statistics

Table III presents the summary statistics of the monthly excess portfolio returns. Panel A
displays the whole time span (2009-2019) and panel B covers the post-financial crisis period
(2013-2019). The mean excess returns of the high rated ESG portfolios are in both filters
higher than the low rated counterparts. The table shows positive returns for all portfolios with
returns varying between 0.80% and 0.95%. The returns in the post financial crisis are lower
compared to the returns of the whole period which indicates the negative impact of market
sentiment. Moreover, the ESG100 portfolio generates the lowest returns indicating a U-shaped
relation between stock returns and ESG which is in line with the finding of Barnet & Salomon
(2012). They argue that the ability to profit from ESG depends on stakeholder influence
capacity (SIC). Accordingly, firms with low ESG performance generate negative returns as
they invest more in ESG until the the relationship neutralizes and turns positive as SIC
accrues and triggers better financial performance stemming from higher ESG expenditures.

15
Table III: Summary statistics of monthly portfolio returns (%)
Variable Mean Std.Dev. Min Max
Panel A: 2009-2019
SMB -.028 1.331 -3.310 3.950
HML -.134 1.773 -4.450 4.700
RMW .305 1.133 -2.800 3.330
CMA .004 1.043 -2.710 2.730
Rm-Rf .958 4.125 -11.398 12.167
ESG100 .764 5.938 -13.406 17.496
ESG25 .878 4.797 -14.406 13.252
ESG-25 .764 6.839 -13.283 18.906
ESG10 .949 4.649 -16.129 14.012
ESG-10 .810 7.923 -24.843 21.015
ESGΔ25 .114 5.820 -19.339 14.398
ESGΔ10 .139 7.299 -16.240 24.477

Panel B: 2013-2019
SMB -.093 1.305 -3.310 2.760
HML -.146 1.753 -4.450 4.350
RMW .204 1.043 -2.800 2.790
CMA -.072 1.052 -2.620 2.730
Rm-Rf .704 3.427 -8.687 10.340
ESG100 .878 6.072 -13.406 17.496
ESG25 1.099 4.115 -7.553 13.252
ESG-25 .956 7.261 -13.283 18.906
ESG10 1.232 3.469 -7.201 8.673
ESG-10 .969 8.397 -24.843 19.450
ESGΔ25 .143 6.641 -19.339 14.398
ESGΔ10 .264 7.665 -16.027 24.477

Notes: Table shows the percantage of monthly excess returns. Panel A displays the portfolios for the whole covered time span
2009-2019. Panel B covers the portfolios for the time span of 2013-2019. Where Rm-Rf displays the MSCI World Real estate index return in
excess of the risk free rate. ESG100 covers the whole sample of firms that received an ESG rating. ESG25 and ESG-25 covers the 25 best and 25
worst-in-class respectively. ESG10 and ESG-10 cover the 10% best- and worst-in-class respectively. ESGΔ25 and ESGΔ10 cover the
differenced portfolios for the 25% and 10% respectively.

Table IV displays the descriptive statistics of the variables applied in the mediation analysis.
However, one must take notion that these descriptive statistics are part of a longitudinal
dataset with yearly changes instead of monthly changes. This enables us to add more control
variables in the model since most data available in Datatstream only mutates yearly. The table
displays the total observations (N), the mean, standard deviation, minimum and the
maximum. The N sums up the total observations for every variable. The ESG score ranges
from 2 to 97 with a mean of 39.65 which is a fairly low amount that is in line with previous
findings of Brounen & Marcato (2018).

16
Table IV: Descriptive Statistics of mediation panel data
Variable N Mean Std.Dev. Min Max
ESG 4029 39.65 28.83 2.82 96.28
SIZ(log) 3762 16.28 2.11 11.29 24.76
LEV(%) 3761 38.50 21.40 0 537
LIQ(%) 3598 5 7.02 0 89.60
RET(%) 3671 9.95 29.53 -98.66 548.95
DIV(%) 4529 4.20 3.07 0 36
OPER(%) 3760 3.09 5.10 -.42 .47
Notes: The table displays the different set of variables used in the the panel dataset with the applicable descriptive statistics.
This set is exclusively used for the mediation analysis and denotes me. Where ESG is the one year lagged ESG score, SIZ the firm size, LEV
the amount of leverage, LIQ the liquidity, RET the return index, DIV the dividend yield and OPER the operational performance. The time
span covers 2009 till 2019 and the variables cover yearly results for individual firms.

5. RESULTS

5.1 ESG Portfolios

Graph III presents the portfolio returns for the ten-year period from July 2009 till July 2019.
The monthly portfolio returns in excess of the risk free rate are indexed at the beginning of the
period to display the compounded returns. The graph shows higher returns for the best-in-
class portfolios compared to the worst-in-class portfolios. It also shows that the ESG25 has
higher returns than the ESG10 portfolio. This indicates that higher rated ESG portfolios are
more rewarding.
Graph III: Indexed returns of different portfolios from 2009-2019

300

250

200

150

100

50

0
2009 2010 2011 2012 2012 2013 2014 2015 2016 2017 2017 2018

excess Market ESG100 ESG25 ESG-25 ESG10 ESG-10

Notes: This table plots the excess returns generated by the 4 high and low ESG portfolios filtered on a 25% and 10% cut off, the excess
return of the portfolio that contains the total sample size of real estate firms and the excess return of the MSCI Real estate index which is
used as the market return. The returns are index at the first day of July in 2009 and covers up the returns until end of June in 2019.

Table V summarizes the results for the Fama & French 5 factor model estimation for the total
ESG rated sample (ESG100), the best-in-class ESG portfolios for the 25% and 10% (ESG25 and
ESG10 respectively) the the worst-in-class ESG portfolios for the 25% and 10% (ESG-25 and

17
ESG-10 respectively) and the differenced portfolios for the 25% and 10% (ESG∆25 and ESG∆10
respectively). I control for heteroskedasticity by using white standard errors. I test for the
presence of serial correlation by performing the Breusch Godfrey test. This test shows no
presence of serial correlation. The results show that the market risk, operating profitability
factor, the book-to-market and the investment factor all have a significant impact on the
portfolios. All the portfolios show a positive alpha, however, only the 25% best-in-class
portfolio is positively different from zero4. In addition to that, the alpha only shows a
marginal positive percentage. Consequently, the result in both differenced portfolios show no
significant difference between best- and worst-in-class portfolios. Hence, I fail to find
evidence of a direct association between ESG and higher financial performance. One has to
bear in mind that the correction for the 5 factors is largely responsible for this insignificant
result. However, the factor loadings can still provide valuable insights for real estate
companies. The market risk is significant for all the constructed portfolios, where high rated
ESG portfolios have lower market risk than low rated portfolios. The differenced portfolios,
confirm the significant difference at a 5 and 10 % level in market risk between the high and
low rated ESG portfolios. This finding is in line with multiple studies, which show that firms
with a high degree of responsibility towards ESG are less exposed to overly negative market
reactions or regulatory actions against them (Godfrey et al., 2009; Sassen et. Al, 2016;
Eichholtz, Kok & Yonder, 2012). As for the HML coefficient that concedes negative factor
loadings for both worst-in-class portfolios. This means the low rated ESG portfolios hold
more growth stocks in their portfolio. This study is in line with current research that suggests
that mature firms are more likely to incorporate ESG polices compared to growth firms
(Tamimi & Sebastianelli, 2017). The differenced portfolios confirm this finding with 10 %
significance in both cases. Furthermore, the results show negative factor loadings on the
profitability factor coefficient RMW. Therefore, the sample of portfolios consists of
companies with weak operating profits. At last, the CMA coefficient is negative for the low
rated ESG portfolios. Both differenced portfolios show a statistical significance at a 5 % level,
this indicates that firms which integrate ESG policies pursue more aggressive investments.
This finding is in line with Mariana et al. (2018) who find that integrating ESG increases
capital expenditures significantly.

4
based on 10 % significance level

18
 Table V: Performance level portfolios in a multifactor regression model, 2009-2019

Coefficient 𝐸𝑆𝐺$++ 𝐸𝑆𝐺%) 𝐸𝑆𝐺*%) 𝐸𝑆𝐺$+ 𝐸𝑆𝐺*$+ ESG∆25 ESG∆10

α 0.0861 0.694* 0.003 0.465 0.203 0.691 0.262

(0.444 (0.372) (0.539) (0.291) (0.607) (0.507) (0.649)
ß0 (ß) 0.873*** 0.593*** 0.888*** 0.737*** 0.870*** -0.295** -0.132*
(0.101) (0.112) (0.115) (0.0947) (0.137) (0.113) (0.090)
ß1 (SMB) -0.536 -0.333 -0.454 -0.0959 -0.677 0.121 0.581
(0.324) (0.293) (0.400) (0.260) (0.488) (0.363) (0.521)
ß2 (HML) -0.810** 0.113 -1.116** -0.102 -1.389** 1.229** 1.287**
(0.407) (0.412) (0.491) (0.364) (0.550) (0.503) (0.569)
ß3 (RMW) -0.938* -1.238** -0.842 -0.778* -1.429* -0.396 0.651
(0.539) (0.501) (0.649) (0.439) (0.801) (0.629) (0.806)
ß4 (CMA) 1.032** -0.0637 1.368*** -0.247 1.396** -1.432** -1.643**
(0.427) (0.502) (0.517) (0.397) (0.656) (0.687) (0.707)

Observations 120 120 120 120 120 120 120

R-squared 0.428 0.396 0.338 0.496 0.274 0.149 0.064
Notes: This table summarizes for each portfolio the factor coefficients, the R-squared and the alpha’s using the Fama French
5 factor model. The coefficients ß0, ß1, ß2, ß3, ß4 refer to the factors reported in the brackets next to the coefficient. The
portfolios are value-weighted. The ESG100 portfolio consists of all ESG rated real estate companies in the dataset. The ESG25
and ESG-25 consist of the highest and lowest rated 25 % ESG rated real estate firms in the dataset. The ESG10 and ESG-10 are
the highest and lowest rated ESG rated real estate firms based on a 10 % level. The ESG∆25 is the differenced portfolio the 25
% ESG robust standard errors are between brackets reported under the applicable coefficients. The time span is based on
2009-2019. ***, **, * indicate significance levels based on 1, 5 and 10 % level.

5.2.2 Results for post financial crisis period

During the financial crisis the ESG portfolios might have been influenced by market
sentiment. To generate more consistent results, I compute the returns for the post-crisis period
(2013-2019). The results of the regression are summarized in Table VI. The alphas show
higher positive percentages with higher levels of significance on both high rated portfolios.
However, the differenced portfolios show no significant differences between the high and low
rated portfolios. Hence, I can conclude there are no notable differences present in excess
returns between the two sub periods. The interpretations of the control factors remain
unaltered compared to the regression of the whole period.

19
 Table VI: Performance level portfolios in a multifactor regression model, 2013-2019
Coefficient 𝐸𝑆𝐺$++ 𝐸𝑆𝐺%) 𝐸𝑆𝐺*%) 𝐸𝑆𝐺$+ 𝐸𝑆𝐺*$+ ESG∆25 ESG∆10

α 0.373 0.918** 0.400 0.724*** 0.430 0.518 0.294

(0.520) (0.355) (0.653) (0.269) (0.742) (0.667) (0.760)
ß0 (ß) 0.991*** 0.703*** 1.028*** 0.745*** 1.101*** -0.325* -0.355*
(0.147) (0.109) (0.178) (0.0595) (0.205) (0.177) (0.213)
ß1 (SMB) -0.837* -0.533* -0.911 -0.113 -1.098 0.378 0.985
(0.447) (0.281) (0.562) (0.238) (0.675) (0.566) (0.673)
ß2 (HML) -1.376** -0.125 -1.751** 0.392* -2.018** 1.625* 2.410***
(0.671) (0.343) (0.873) (0.233) (0.989) (0.855) (0.904)
ß3 (RMW) -1.638 -1.776*** -1.678 -0.0534 -2.332 -0.0980 2.278
(0.991) (0.508) (1.286) (0.383) (1.597) (1.283) (1.469)
ß4 (CMA) 1.900*** 0.268 2.306*** -0.577* 2.192** -2.038** -2.768***
(0.534) (0.611) (0.713) (0.321) (0.881) (0.984) (0.851)

Observations 84 84 84 84 84 84 84
R-squared 0.409 0.431 0.339 0.541 0.293 0.175 0.155
Notes: This table summarizes for each portfolio the factor coefficients, the R-squared and the alpha’s using the Fama French
5 factor model. The coefficients ß0, ß1, ß2, ß3, ß4 refer to the factors reported in the brackets next to the coefficient. The
portfolios are value-weighted. The ESG100 portfolio consists of all ESG rated real estate companies in the dataset. The ESG25
and ESG-25 consist of the highest and lowest rated 25%t ESG rated real estate firms in the dataset. The ESG10 and ESG-10 are
the highest and lowest rated ESG rated real estate firms based on a 10 % level. The ESG∆25 is the differenced portfolio the
25% ESG robust standard errors are between brackets reported under the applicable coefficients. The time span is based on
2013-2019. ***, **, * indicate significance levels based on 1, 5 and 10 % level.

20
5.3 Mediation of operational performance
The portfolio results show that it is not feasible to generate excess returns directly by
investing in a best-in-class ESG portfolio. Therefore, no positive direct effect between ESG
and financial performance is found. Table VII presents the results of the total effect of ESG
on financial performance after controlling for dividend, size, liquidity and leverage. The graph
shows an insignificant positive ESG coefficient, which is in line with the results of the best-
in-class ESG portfolios. However, the indirect effect is yet to be observed as financial
performance is both affected by direct and indirect effect.

Table VII: multifactor regression of the total effect

VARIABLES RET(=DEP.)

ESG 0.00374
(0.0192)
DIV 0.868***
(0.196)
SIZ -0.317
(0.266)
LIQ 13.440
(8.580)
LEV -2.960
(2.689)

Observations 2,941
Notes: Table VII shows the regression of a multifactor model with dependent variable stock returns as the independent variable. Where ESG
stands for ESG, DIV for dividend yield, SIZ for firm size, LIQ for liquidity and LEV for leverage. The longitudinal dataset covers the years
2009-2019.

Implementing a mediating variable allows us to make distinctive conclusions about indirect

and direct effects. Therefore, I can focus on the dynamics of direct and indirect effects by
implementing operational performance as a mediating variable. The results of the mediation
analysis are summarized in TABLE VII. Where the dependent variables model in 3 and 4 are
operational-(OPER) and financial performance (RET) respectively. There are no violations
regarding heteroskedasticity because of robust corrections to standard errors in SEM. When
testing for a normal distribution using the Kurtosis test, a test statistic of 3.373 is obtained,
which is significant at a 1 % level meaning that I reject the null-hypothesis of having a
normally distributed sample. However, Little et al. (2007) stress that the normality assumption
is more tenable when the sample size is sufficiently large. In addition to that, there is an
assessment of multicollinearity. The results of the correlation matrix show no significant
correlation between the variables, the output is displayed in the appendix.

21
From the table we see that the conditions for mediation are met since ESG has a significant
impact on operational performance(OPER) and operation performance a significant impact on
returns(RET). The indirect effect is the product of these coefficients which equals a positive
increase of 0.0084(=76.64*0.00011) % in returns. To check whether the indirect effect is
different from zero I use the Sobel test (Sobel, 1982). The test statistic of 6.52 means we
reject the null-hypothesis of having no indirect effects at a 1 % significance level. Therefore, a
1-point increase in ESG results, via operational performance, in a return increase of 0.0084%.
Furthermore, we see that the ESG coefficient shows a direct effect of -0.010%. Comparing
this to the effect of ESG found earlier (0.00374%), we observe that the effect of ESG through
operational performance neutralizes the direct effect of ESG on returns. This suggests that the
finding of better operational performance that flows from an active ESG strategy is already
incorporated by the market (Caijas et al., 2011; Eicholtz et al., 2012). As such, I suggest that
better ESG performance is observable by the market and excludes arbitrage opportunities
stemming from a higher operational performance as a result of an active ESG strategy.

Table VIII: Structural Equation Model results

MODEL 3 MODEL 4
VARIABLES OPER(=DEP.) RET(=DEP.)

OPER 76.64***
(11.74)
ESG 0.000111*** -0.010
(3.13e-03) (0.020)
DIV 0.0352 -1.135***
(0.0318) (0.202)
SIZ -0.338*** -0.060
(0.0434) (0.279)
LIQ 5.950*** 7.157
(1.400) (8.956)
LEV -1.740*** -1.366
(0.440) (2.812)

Observations 2,941 2,941

Notes: this table shows the structural equation modelling results that modelled operating performance (OPER)
as the mediator variable and the yearly % change in the return index (RET) as the dependent variable.
The main independent is ESG which is the one-year lagged ESG score, DIV
which is the dividend yield, SIZ which covers the size of the firm computed as the logarithm of the total assets,
LIQ which covers the liquidity and is computed as the total cash divided by the total assets. At last LEV, which covers
the Leverage and is computed as the total cash divided by the total assets. The time span of the mediation analysis
covers 2009 till 2019. ***, **, * indicate significance levels based on 10, 5 and 1% respectively.

22
Conclusion
This paper investigates whether ESG is significantly associated with higher financial
performance using a large number of global listed real estate companies from the period 2009
untill 2019. More specifically, I advance our understanding of the link between ESG and
financial performance by shedding light on both the direct and indirect effects. I propose two
methods to measure the direct and indirect effects.
First, I analyse the direct effect of ESG and financial performance by constructing portfolios
of best- and worst-in-class ESG scores. Accordingly, measuring the returns by the Fama &
French 5 factor model I adjust the returns for risk. I find that the market incorporates the
integration of ESG in the stock price, since there is no presence of positive significant alphas.
Importantly, I also document lower market betas for the best-in-class ESG portfolios. This
finding is in line with (Eichholtz, Kok & Yonder, 2012) who suggest that real estate firms
with active ESG performance have lower exposure to energy price fluctuations and vacancy
risk, and therefore less exposure to the business cycle. Furthermore, the results show that high
ESG rated firms are mature firms that, in addition to that, engage in higher excessive
investments compared to their conservative counterpart. This finding indicates that higher
investments are necessary when integrating ESG policies.
Second, I propose operational performance as a mediator in the relationship between ESG and
financial performance to analyse the indirect effect. I find evidence that active ESG
performance increases higher operational performance and, subsequently, increases the
financial performance. That is, ESG positively affects financial performance through its effect
on operational performance. However, since there is no total effect present I conclude that the
market already incorporates the value of the effect of ESG on operational performance which
is in line with the efficient market hypothesis.
This paper has important implications for real estate investors. It shows that investors cannot
solely base their investment decisions on ESG but also consider the implications of ESG in
terms of operational performance, a lower market risk and taking notion of the aggressive
investments necessary to incorporate ESG. However, a few potential limitations exist. First,
the applied Fama & French 5 factor model does not cover real estate portfolios specifically.
Therefore, caution is advised when interpreting the significant factor loadings. Second, there
is a problem of endogeinity because ESG is not the only factor influencing operational
performance which decreases the capability to isolate the finding of this study. Future
research therefore should add more relevant variables that impact operational performance
specifically.

23
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 Appendix A: Correlation matrix of variables in the mediation analysis

Variables (1) (2) (3) (4) (5) (6) (7)

RET OPER ESG SIZ LIQ LEV DIV
(1) RET 1.000
(2) OPER 0.131 1.000
(3) ESG 0.006 0.068 1.000
(4) SIZ -0.043 -0.048 -0.051 1.000
(5) LIQ 0.039 0.070 -0.068 0.060 1.000
(6) LEV -0.040 -0.088 -0.195 -0.031 -0.205 1.000
(7) DIV 0.002 0.014 -0.126 0.016 0.006 0.027 1.000

Notes: This table summarizes the time average of panel data correlations ranging from the period 2009-2019. The tables concedes of the
variables yearly change in return index (RET), operational performance (OPER), the ESG score (ESG), the liquidity (LIQ), the leverage
(LEV) and the dividend yield (DIV).

Appendix B: Sobel Test (1982)

]*_
=z (4)
_ ` *abc` C] ` *abd`

Appendix C: Performance level portfolios in a multifactor regression model, 2009-2019

(ENGX as market premium)
Coefficient 𝐸𝑆𝐺$++ 𝐸𝑆𝐺%) 𝐸𝑆𝐺*%) 𝐸𝑆𝐺$+ 𝐸𝑆𝐺*$+ ESG∆25 ESG∆10

α 0.00276 0.00838** 0.00206 0.00540* 0.00437 0.00632 0.00103

(0.00508) (0.00418) (0.00593) (0.00316) (0.00660) (0.00517) (0.00653)
ß0 (ß) 0.670*** 0.444*** 0.674*** 0.634*** 0.632*** -0.230** 0.00214
(0.110) (0.110) (0.125) (0.0908) (0.142) (0.107) (0.157)
ß1 (SMB) -0.724** -0.463 -0.646 -0.244 -0.870* 0.184 0.627
(0.355) (0.303) (0.428) (0.271) (0.520) (0.367) (0.532)
ß2 (HML) -0.915** 0.0423 -1.222** -0.193 -1.491** 1.264** 1.298**
(0.447) (0.422) (0.527) (0.359) (0.575) (0.507) (0.574)
ß3 (RMW) -1.295** -1.487*** -1.210* -1.045** -1.802** -0.277 0.758
(0.573) (0.502) (0.682) (0.460) (0.832) (0.620) (0.800)
ß4 (CMA) 0.772 -0.241 1.103** -0.458 1.133* -1.344* -1.591**
(0.476) (0.535) (0.552) (0.419) (0.678) (0.679) (0.714)

Observations 120 120 120 120 120 120 120

R-squared 0.306 0.301 0.239 0.422 0.192 0.135 0.059
Notes: This table summarizes for each portfolio the factor coefficients, the R-squared and the alpha’s using the Fama French
5 factor model. The coefficients ß0, ß1, ß2, ß3, ß4 refer to the factors reported in the brackets next to the coefficient. The
portfolios are value-weighted. The ESG100 portfolio consists of all ESG rated real estate companies in the dataset. The ESG25
and ESG-25 consist of the highest and lowest rated 25 % ESG rated real estate firms in the dataset. The ESG10 and ESG-10 are
the highest and lowest rated ESG rated real estate firms based on a 10 % level. The ESG∆25 is the differenced portfolio the 25
% ESG robust standard errors are between brackets reported under the applicable coefficients. The time span is based on
2009-2019. ***, **, * indicate significance levels based on 1, 5 and 10 % level.

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