Abstract

This thesis examines whether ESG ratings meaningfully influence portfolio performance. Using ten years of data for 29 Dow Jones Industrial Average companies including daily stock prices, annual ESG scores, and market values, the results show that the ESG-weighted portfolio behaves very similarly to an equal-weighted one. Both perform well in strong market years, such as 2017, 2019, and 2024, and both exhibit weaker outcomes during downturns, particularly in 2018 and 2022. ESG weighting does not consistently improve or reduce performance. The market-value-weighted portfolio performs best when large-capitalisation firms dominate the market, whereas the minimum-variance portfolio achieves lower risk at the cost of lower potential returns. As expected, the tangency portfolio displays substantial instability, with large swings in volatility and Sharpe ratios due to the sensitivity of mean–variance optimisation. An important practical insight emerging from this analysis is that the absence of an optimisation process in the ESG-weighted strategy can be viewed as an advantage. Because ESG-weighted portfolios rely only on rescaled ESG scores rather than estimated expected returns or covariances, they avoid the estimation errors and instability that often undermine optimisation-based strategies. This makes ESG weighting simple, transparent, and less sensitive to noisy input data. Overall, the findings suggest that ESG ratings do not materially alter investment outcomes in this context. Incorporating ESG considerations does not harm risk-adjusted performance, but it also does not deliver a systematic advantage. ESG can therefore be integrated into portfolio construction in a straightforward way without optimisation and without compromising performance, yet it cannot be relied upon as a consistent source of outperformance. …víceméně