We studied 235 stocks–and found that ESG metrics don’t just make a portfolio less profitable, but also less likely to achieve its stated ESG aims

(Credit: Getty Images)

Institutions have become increasingly skeptical about ESG ratings–and rightly so. In our recent research, we show how the inclusion of ESG metrics in assembling a portfolio can lead to unintended consequences.

After gathering the subset of stocks that were traded on a daily basis between 1998 and 2020 on the three major exchanges as well as ESG data, we quantitatively studied the inclusion of ESG metrics in two ways. First, we consider trading strategies that only rely on returns, rather than a combination of returns and ESG scores. We found that non-ESG rules that incorporate returns result in higher ESG scores, compared with ESG-based rules.