The futility of measuring relative performance of ESG portfolios if ESG investing improves the market performance

If an economy is affected by the level of ESG investing, then the case for ESG investing is not only based solely on ESG portfolio outperformance, but also on the improvement to the economy that ESG investing provides. Adopting a theoretical portfolio construction model, we find that the optimal allocation to ESG investing is governed more by economic improvement than by ESG out/underperformance. Indeed, even if the ESG portfolio underperforms, an allocation to ESG investing can still be warranted due to better investor return via an improved economy. Evidently, asking whether ESG investing improves an economy is more pertinent than whether ESG portfolios outperform.