Efficient SRI/ESG Portfolios

Abstract

Using an earnings forecasting model has been shown to be useful and highly statistically significant in U.S. stock selection. We find that incorporation of ESG criteria can enhance stockholder returns holding risk constant under reasonable assumptions. The novel approach here uses a normalization of ESG strengths and weaknesses ratings, applied in both robust simply-weighted and realistic optimized portfolio settings. In part, it confirms a now classical “no-cost” result for certain SRI/ESG investment constraints and, with Diversity, Human Rights, and Governance criteria, shows that SRI/ESG information can enhance portfolio returns. Thus, SRI/ESG investors may not have to expect lower portfolio returns and Sharpe Ratios.

Keywords: Socially Responsible Investing, ESG, Portfoio Selection

JEL Classification: G00