Quantifying the Returns of ESG Investing: An Empirical Analysis with Six ESG Metrics
43 Pages Posted: 3 Mar 2023 Last revised: 16 Jun 2023
Date Written: February 27, 2023
We quantify the financial performance of environmental, social, and governance (ESG) portfolios in the U.S., Europe, and Japan, based on data from six major ESG rating agencies. We document statistically significant excess returns in ESG portfolios from 2014 to 2020 in the U.S. and Japan. We propose several statistical and voting-based methods to aggregate individual ESG ratings, the latter based on the theory of social choice. We find that aggregating individual ESG ratings improves portfolio performance. In addition, we find that a portfolio based on Treynor-Black weights further improves the performance of ESG portfolios. Overall, these results suggest there is a significant signal in ESG rating scores that can be used for portfolio construction despite their noisy nature.
Keywords: Environmental; Social and Governance; ESG; Impact Investing; Treynor-Black Portfolio; Voting Aggregation
JEL Classification: C10, G11, G12, Q56
Suggested Citation: Suggested Citation