Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020

This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020.

The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods.

Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance.

If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers.

Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.