Beyond Profits: Exploring the Investment Styles and Risk-Adjusted Returns of ESG-Driven Portfolios

Abstract

This study uses daily data to examine how different ESG implementations affect performance and portfolio characteristics. With a non-homogenous view of how ESG investing is defined, ten different value-weighted portfolios are constructed. The geographical focus is the US market, with the S&P 500 total return index (SPXTR) as the screening universe. We use different methods to assess the research questions, with the Carhart four-factor model being the main one. To account for eventual time-varying aspects, the sample is split into two periods, 2007-2014 and 2015-2022. The results suggest that pursuing a non-ESG approach is overall better for risk-adjusted returns. Furthermore, some investors may wish to implement ESG into their portfolios. If this is the case, a negative screening technique is more advantageous for risk-adjusted returns. The results also indicate that pursuing specific ESG approaches will imply different portfolio tilts. Moreover, the results suggest that in general, the ESG portfolios are tilted toward larger capitalization and value stocks, while non-ESG portfolios are tilted toward growth stocks and smaller firms. Somewhat time-varying results are found. However, the results largely remain the same when the time period is split.