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Risk-return performance of optimized ESG equity portfolios in the NYSE

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  • López Prol, Javier
  • Kim, Kiwoong

Abstract

The literature on the risk-return performance of equity portfolios depending on their ESG score is mixed. While most studies use some variant of Fama-French, we optimize equity portfolios of the NYSE between 2018-2019 according to the Markovitz mean-variance framework depending on their ESG scores to better reflect the behavior of financial agents. We then systematically analyze the optimal and efficient portfolio performance and find that high ESG portfolios have lower volatility and even lower returns, resulting in lower Sharpe ratios. The lower performance of high ESG portfolios is homogeneous across the three ESG components and robust across specifications.

Suggested Citation

  • López Prol, Javier & Kim, Kiwoong, 2022. "Risk-return performance of optimized ESG equity portfolios in the NYSE," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004895
    DOI: 10.1016/j.frl.2022.103312
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    1. repec:fst:rfsisf:v:7:y:2022:i:13:p:174-181 is not listed on IDEAS
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    3. Kudryashov, Alexander, 2023. "ESG Transformation: A Roadmap for Russia’s Sustainable Development /– Tallinn : OPEN EUROPEAN ACADEMY OF PUBLIC SCIENCES OÜ, 2023," OSF Preprints 6j8ux, Center for Open Science.
    4. Tatarnikova, Olga & Duchêne, Sébastien & Sentis, Patrick & Willinger, Marc, 2023. "Portfolio instability and socially responsible investment: Experiments with financial professionals and students," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    5. Laurentiu Paul Baranga & Elena-Ioana Tanea, 2022. "Introducing the ESG reporting - benefits and challenges," Journal of Financial Studies, Institute of Financial Studies, vol. 13(7), pages 174-181, November.
    6. David Buckle, 2023. "The futility of measuring relative performance of ESG portfolios if ESG investing improves the market performance," Journal of Asset Management, Palgrave Macmillan, vol. 24(7), pages 601-607, December.
    7. Kumar Manaswi & Archana Singh & Vikas Gupta, 2023. "Building a Better Future with Sustainable Investments: Insights from Recent Research," Indian Journal of Human Development, , vol. 17(2), pages 320-343, August.
    8. Capelli, Paolo & Ielasi, Federica & Russo, Angeloantonio, 2023. "Integrating ESG risks into value-at-risk," Finance Research Letters, Elsevier, vol. 55(PA).

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