Does the equity market price ESG momentum? Evidence from South Africa

Rabothata, Boipelo

Does the equity market price ESG momentum? Evidence from South Africa

Thesis / Dissertation

2026

Publisher

University of Cape Town

Department

Department of Finance and Tax

Faculty

Faculty of Commerce

Abstract

This study examines whether Environmental, Social, and Governance (ESG) practices and ESG momentum are priced by the South African equity market. It investigates the relationship between a company's ESG risk profile and returns, as well as whether improvements in ESG scores affect performance. An ESG and ESG momentum factor were developed and integrated into a modified Fama–French three-factor model to assess whether these factors enhance explanatory power. The analysis uses Bloomberg ESG data for JSE-listed firms between 2015 and 2023. Portfolios were constructed by double-sorting on ESG scores and firm size, with regression analysis performed on 12,224 firm-month observations. The results reveal statistically significant positive premiums for low ESG (9%) and low ESG momentum stocks (11%), suggesting that investors in the South African market are compensated for bearing higher ESG-related risks. On a risk-adjusted basis, lower-scoring ESG stocks and firms with deteriorating ESG momentum outperformed their higher-rated counterparts. However, the explanatory power of the modified model remains limited, with adjusted R² values of around 12%, indicating only marginal improvement over the traditional three-factor model. This research contributes to the limited literature on ESG momentum by providing evidence from an emerging market. The findings suggest that while ESG and ESG momentum may be priced in South Africa, their explanatory power is modest. These results offer insights for investors and policymakers seeking to understand how ESG-related risks influence returns in developing markets.