ESG Investing: Too Good to be True?

Good versus Bad Corporates

January 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • ESG factors generated positive excess returns since 2009
  • Show positive exposure to Low Volatility & Quality and negative exposure to Value & Size
  • Factor exposure is likely structural and not temporary


BlackRock is aggressively launching products with high environmental, social, and governance (ESG) ratings. The firm’s CEO, Larry Fink, recently predicted that assets under management (AUM) in the ESG category will grow from the current $25 billion to $400 billion in 2028.

Investing in good corporates is intuitively appealing. Who doesn’t want to make money while doing good? But do stocks that rank high on ESG metrics actually outperform? After all, sin stocks — think gambling, alcohol, tobacco, and firearms — generate above-average returns, according to research. It would be a bit paradoxical if ESG and more-virtue-challenged factors both outperformed. For insight into these issues, we explored ESG factor performance in the US stock market.


We explored ESG data from a US provider that aggregates ESG scores from multiple sources. Using data dating back to 2009, we divided ESG stocks into four main groups: Citizenship, Environmental, Employees, and Governance. Next, we created beta-neutral long-short portfolios composed of the top and bottom 10% of US stocks as ranked according to these four factors. We only included companies with market capitalizations in excess of $1 billion. The resulting portfolios are rebalanced monthly and include 10 basis points (bps) of cost per transaction.


Except for the Employees factor, all ESG categories generated positive returns from 2009 to 2018. Based on these results, being a good corporate would seem to pay off.