Redirecting the Loop: The ESG Investing Versus Performance Paradox

Please feel free to join me between 2:30-3:30pm to discuss whatever you would like about my research!

Meeting ID: 328 005 1636

Passcode: aloparto

This literature review aims to address why there is a lack of consensus surrounding the relationship between environmental, social and governance (ESG) investing and risk-adjusted financial returns (RAR); which methodologies produce the most consistent results with respect to this relationship; and if there are trends within methodologies concluding with the same relationship. It approaches these questions from two interrelated angles: theoretical origins and empirical evidence, as theoretical origins contextualize the bases of empirical findings. Empirical evidence was collected by analyzing 13 studies conducted between 2015 and 2020 focusing on the impact of ESG investing on RAR among publicly listed U.S. securities. Codes were assigned to each paper according to five relevant classifications to identify trends. Most papers concluded with a neutral relationship, whereas two concluded with a positive one. Only one paper employed an empirical testing methodology and many with neutral findings over-diversified their samples and portfolios, potentially clouding results, illuminating the importance of theory. Some researchers introduce holes within arguably the most practiced and influential financial theory, which comprises the basis of most RAR measurements—Modern Portfolio Theory. All papers included in the systematic literature review included performance metrics based on Modern Portfolio Theory principles: the two-dimensional axes of risk and return and diversification. Researchers have alluded to a need for, and suggested, more holistic performance measurement tools that include nonfinancial factor consideration. According to findings, future research may benefit from employing more diverse methodologies and newer, more holistic performance determinants within studies.