Impact of ESG Rating of Companies on the Portfolio Performance

Abstract

Socially responsible investing is becoming more popular among people because people are becoming more concerned about the environment and society. Socially responsible investors screen the company by considering the ESG factors. The question raced is whether socially responsible investing improves the portfolio performance and how the funds perform during uncertain times like the Covid-19 pandemic. Since many critics of ESG funds say that the ESG funds’ performance highly depends on Software and Service company stocks, so the relevance of Software and Service companies in the fund has been analyzed in this research. The portfolios have been formed by using the Markowitz mean-variance portfolio model, and the performance of the minimum variance portfolio has been studied. The fund performance has been analyzed using the Sharpe ratio, and the result concludes that the ESG fund performance with minimum variance has an abnormally high Sharpe Ratio of 10.8. A similar type of performance was identified during the Covid-19 pandemic. The abnormally high Sharpe ratio will encourage investors to move towards socially responsible investing.