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Revisiting ESG performance: do high scores translate to higher returns? A risk-adjusted analysis of S&P 500 portfolios

Author

Listed:
  • Carvalho, Paulo V.
  • Falcão, Pedro F.
  • Pinheiro, Carlos Manuel
  • Carrão, Diogo

Abstract

The rise of ESG investing is often underpinned by the belief that sustainability enhances long-term financial performance. Research suggests ESG scores correlate with superior stock market returns, but the evidence remains mixed. We contribute to the debate by directly comparing the performance of top- and bottom-ranked ESG portfolios within the S&P 500 over the period 2005–2024. Using raw returns, we find that low ESG-rated portfolios consistently outperform their higher-rated counterparts in absolute terms. However, when accounting for risk, using risk-adjusted metrics — specifically the modified Sharpe ratio — no statistically significant differences emerge. These findings challenge prevailing assumptions about ESG investing and highlight the need for a more nuanced understanding of the trade-offs between sustainability and profitability in portfolio construction.

Suggested Citation

  • Carvalho, Paulo V. & Falcão, Pedro F. & Pinheiro, Carlos Manuel & Carrão, Diogo, 2026. "Revisiting ESG performance: do high scores translate to higher returns? A risk-adjusted analysis of S&P 500 portfolios," Finance Research Letters, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finlet:v:91:y:2026:i:c:s1544612325027163
    DOI: 10.1016/j.frl.2025.109467
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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