ESG Rating, Risk and Return: Evidence from the S&P 500 Index

The growing interest of investors in environmental, social, and governance (ESG) issues has led asset managers to create new approaches to strategic asset allocation that effectively incorporate ESG factors into the portfolio optimization process. This paper fits into the line investigating the relationship between ESG ratings and market performance. To do so we devise a two-step methodology on the stocks panel composing the S&P500 index. Specifically, we first employ a mean-variance portfolio approach combined with a random inclusion-exclusion method to analyze portfolio performance. Subsequently, we conduct regression analysis and apply copulas to further validate our initial findings. Our results reveal a weak relationship between ESG ratings and the risk-return profiles of firms, aligning with existing literature on the topic. These findings contribute to supporting the hypothesis that ESG ratings influence on market outcomes remains limited and do not play a decisive role in influencing the risk-return dynamics of the stocks.