Revisiting ESG performance: Do high scores translate to higher returns? A risk-adjusted analysis of S&P 500 portfolios

Abstract

The rise of ESG investing is often underpinned by the belief that sustainability enhances long-term financial performance. Research suggests ESG scores correlate with superior stock market returns, but the evidence remains mixed. We contribute to the debate by directly comparing the performance of top- and bottom-ranked ESG portfolios within the S&P 500 over the period 2005–2024. Using raw returns, we find that low ESG-rated portfolios consistently outperform their higher-rated counterparts in absolute terms. However, when accounting for risk, using risk-adjusted metrics — specifically the modified Sharpe ratio — no statistically significant differences emerge. These findings challenge prevailing assumptions about ESG investing and highlight the need for a more nuanced understanding of the trade-offs between sustainability and profitability in portfolio construction.