Quantifying the Returns of ESG Investing: An Empirical Analysis with Six ESG Metrics

43 Pages Posted: 3 Mar 2023

See all articles by Florian Berg

Florian Berg

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Manish Singh

Massachusetts Institute of Technology (MIT) - Electrical Engineering and Computer Science

Ruixun Zhang

Peking University - School of Mathematical Sciences

Date Written: February 27, 2023

Abstract

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

Berg, Florian and Lo, Andrew W. and Rigobon, Roberto and Singh, Manish and Zhang, Ruixun, Quantifying the Returns of ESG Investing: An Empirical Analysis with Six ESG Metrics (February 27, 2023). Available at SSRN: https://ssrn.com/abstract=4367367 or http://dx.doi.org/10.2139/ssrn.4367367

Florian Berg

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

Manish Singh

Massachusetts Institute of Technology (MIT) - Electrical Engineering and Computer Science ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Ruixun Zhang

Peking University - School of Mathematical Sciences ( email )

5 Yiheyuan Road
Beijing, Beijing 100871
China

HOME PAGE: http://www.math.pku.edu.cn/teachers/ZhangRuixun%20/index.html

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