ESG: a new dimension in portfolio allocation

In this paper, we examine the impact of including environmental, social and governance (ESG) criteria in the allocation of equity portfolios. We focus on the risk and return characteristics of the resulting ESG portfolios and investment strategies. Two specific measures are considered to quantify the ESG performance of a company; the ESG rating and the greenhouse gas (GHG) emission intensity. For both measures, we carry out empirical portfolio analyses with assets in either the STOXX Europe 600 or the Russell 1000 index. The ESG rating data analysis does not provide clear-cut evidence for enhanced performance of portfolios with either high or low ESG scores. We moreover illustrate that the choice of rating agency has an impact on the performance of ESG-constrained portfolios. The analysis on GHG intensities shows that portfolios with reduced emissions do not necessarily have increased risk or diminished returns.