Abstract
More and more, Environmental, Social, and Governance (ESG) factors are guiding how we invest in portfolios, due to a greater focus on sustainable finance. ESG integration is examined here in terms of its effects on the risk and return of a portfolio, with data from a sample of global equities from 2015 to 2023. We use MSCI and Sustainalytics’ ESG ratings to select environmentally or socially screened portfolios and measure their outcomes against regular benchmarks adjusting for risk-adjusted factors. To identify the effect of ESG, we perform regressions and factor models that control for the factors of size, value and momentum. Copious evidence proves that better ESG scores in a portfolio correlate with lower volatility, greater safeguard on losses and achievement of the same returns as other portfolios, especially when markets are volatile. The analysis by sector makes clear that preventing risks is achieved mainly through addressing environmental and governance problems rather than social ones. These findings support that paying attention to ESG helps a company manage risks and create value over time. By studying this, researchers join the debate about whether green investing affects profits positively or negatively and present options for both asset managers and policy officials interested in promoting eco-friendly investments. Issues concerning how ESG metrics should be made consistent and the use of new tech for ESG analytics are also looked at.