ESG Portfolios in Different Markets - Investigating the Relationship Between ESG Performance and Financial Performance

Abstract: By applying one of the largest datasets on ESG ratings to date with around 8000 companies included during the sample period between 2006-2021. This paper investigates the increasingly popular link between firms’ social and financial performance and the potential abnormal returns to be found using ESG investment strategies. To examine this relationship, a series of portfolios are constructed based on firms with high and low ESG ratings as well as portfolios taking the difference between the high and the low portfolios to measure abnormal returns between the two. To check the results for robustness, additional portfolios are implemented based on variables such as portfolio size, subperiods, weighting method, and finally, firm selection criteria where a best-in-class approach is applied. The portfolios are then evaluated using the Carhart (1997) four-factor model. The result in this paper indicates that difference portfolios fail to find any consistent abnormal performance between investing in portfolios containing high ESG-rated firms and low ESG-rated firms across the three regions for the entire period. When looking at the individual high and low-rated portfolios, the low-rated portfolios frequently outperform their high counterpart, and when splitting the sample period in two and applying different robustness tests, some patterns of significant abnormal returns are found. The results also visibly show higher abnormal returns for the high (low) portfolios using equally weighted stocks than weighting based on market capitalization. The overall presence but inconsistency of the significant alphas in the portfolios suggest investors to be cautious but curious in the attempts of investment strategies based on ESG portfolios