ESG integration and financial performance. Investment analysis of ESG portfolios compared with traditional ones utilising equally weighted and mean-variance methods

Abstract

Nowadays, Environmental, Social, and Governance (ESG) factors have gained significant attention from investors, consequently playing a key role in investment decision-making.

Several studies have shown the importance of ESG factors, documenting that portfolio management strategies that integrate ESG criteria perform better compared to other traditional approaches based solely on considering financial value.

Since ESG integration is a relatively new concept that is still undergoing development by legislators and financial services companies, this study aims to present the main elements that define sustainable investment. Moreover, it aims to highlight the lack of general rules on the identification, evaluation, and construction of both ESG factors and their related financial instruments such as indices and ratings. However, the principal objective of this project was to conduct a financial analysis of ESG portfolios in comparison with traditional ones, assessing whether there is a positive correlation between ESG integration and the financial outperformance of the investments. In addition, a sector analysis was undertaken to explore where companies with better ESG performance operate mostly in.

As per its findings, portfolios composed by companies with the best ESG scores yield to higher and better risk-return profiles than those composed of companies with a weak ESG profile, confirming the evidence present in the existing literature concerning the sustainability investing frontier.