Green fees: Sustainability impacts on portfolio management

As Environmental, Social, and Governance (ESG) regulations tighten, portfolio managers must navigate the trade-offs between sustainability, financial performance, and implementation costs. This is the first study to analyze the impact of ESG rater heterogeneity on portfolio outcomes while explicitly incorporating the transaction costs generated by fixed-interval rebalancing. We assess portfolios using several ESG screening approaches at varying intensity levels using ratings from Refinitiv, Bloomberg, and MSCI. We construct 182 portfolios from the constituents of the S&P 500, S&P 400, and STOXX 600 indices, with daily observations from 2014 to 2024. Our results show that ESG screening systematically affects portfolio performance, with effects depending on allocation strategy, rating provider, and market context. Stricter screening thresholds amplify these differences by constraining investable universes and increasing rebalancing costs. In addition, we identify key drivers of transaction costs, highlighting the critical role of rater selection and price drifts. Additionally, we perform a block bootstrap simulation for the S&P 500, generating 15,500 individual portfolio paths, and apply a paired permutation test to demonstrate the significance and robustness of the observed differences. • The study analyzes the impact of different ESG rating providers on portfolio outcomes while explicitly accounting for transaction costs generated by fixed-interval rebalancing. • Results show that portfolio outcomes depend on allocation strategy, rating provider selection, and market context, with effects varying across different screening approaches and intensity levels. • Higher ESG screening thresholds amplify differences in portfolio composition and increase rebalancing costs. • The study identifies key drivers of transaction costs, emphasizing the role of rater selection and price drifts.