ESG or E, S and G investing: a portfolio approach

The study evaluates the performance of Environmental, Social and Governance (ESG)-based active portfolio strategies. It uses annual data of ESG score, Environmental (E) score, Social (S) score and Governance (G) score of constituent firms of the S&P 500 Index and MSCI All Country World Index (ACWI) as proxy for the USA and world markets, respectively, from 2015 to 2022. The study finds that although the average ESG score and individual E, S and G scores of constituent firms of the S&P 500 and MSCI ACWI have increased over the years, the average G score is significantly higher than the average E and S scores across the years. Also, E and S scores are highly positively correlated with ESG scores, whereas the G score is moderately positively correlated with ESG scores. The study creates the value-weighted and equal-weighted quintile portfolios using ESG scores and individual E, S and G scores (low to high) and no-ESG portfolios and rebalances them annually. The study finds that no-ESG and low-ESG portfolios outperform high-ESG portfolios and benchmarks in the US market. In contrast, the world market provides the opposite results for equal-weighted portfolios and inconclusive for value-weighted portfolios. Moreover, equal and value-weighted Environmental, Social and Governance portfolios provide inconclusive results for the USA and world markets. The present study concludes that there is no convincing evidence of ESG investing or non-ESG investing under or overperforming the benchmark or one outperforming the other across markets.