The effect of ESG on portfolio’s alpha and Sharpe ratio

I study the relationship between ESG scores (Environmental, Social, Governance) and ESG-portfolio returns in Europe and the United States. Using portfolio regressions with two different asset pricing models, I find that long-only portfolios consisting of companies having the top ESG scores did not produce regular abnormal returns neither in Europe nor in the United States in a time period from 2003 to 2021. I also analyzed the ESG-portfolios’ returns compared to its risk using the Sharpe ratio. The average annualized Sharpe ratio of a portfolio consisting of European stocks was 0.87, and of US stocks 1.29. Excluding all negative Sharpe ratios from calculations, the respective averages were 1.24 and 1.57. Regarding Sharpe ratios, both ESG-portfolios beat their regional benchmark indices Euro Stoxx 50 and S&P 500 Composite