Does ESG Impact Really Enhance Portfolio Profitability?

Abstract

Over the last few decades, growing attention to the topic of social responsibility has affected financial markets and institutional authorities. Indeed, recent environmental, social, and financial crises have inevitably led regulators and investors to take into account the sustainable investing issue; however, the question of how Environmental, Social, and Governance (ESG) criteria impact financial portfolio performances is still open. In this work, we examine a multi-objective optimization model for portfolio selection, where we add to the classical Mean-Variance analysis a third non-financial goal represented by the ESG scores. The resulting optimization problem, formulated as a convex quadratic programming, consists of minimizing the portfolio variance with parametric lower bounds on the levels of the portfolio expected return and ESG. We provide here an extensive empirical analysis on five datasets involving real-world capital market indexes from major stock markets. Our empirical findings typically reveal the presence of two behavioral patterns for the 16 Mean-Variance-ESG portfolios analyzed. Indeed, over the last fifteen years we can distinguish two non-overlapping time windows on which the inclusion of portfolio ESG targets leads to different regimes in terms of portfolio profitability. Furthermore, on the most recent time window, we observe that, for the US markets, imposing a high ESG target tends to select portfolios that show better financial performances than other strategies, whereas for the European markets the ESG constraint does not seem to improve the portfolio profitability.