The Journal of Impact & ESG Investing

ESG Alpha of Equity Portfolios: Evidence from Europe and the UK

Chakshay Kumar Sharma — 2026-02-27

This paper adds to the growing body of knowledge on the impact of non-financial environmental, social and governance (ESG) factors on long-term financial returns, and investigates if high portfolio ESG improves the quality of equity portfolios in terms of realized returns and risk. Best-in-class positive ESG screening method was deployed using Refinitiv ESG Scores to construct two polarised sets of portfolios each with three portfolio ESG weightings i.e., equal-, value- and rank-weightings. Fifteen years’ daily returns from 2005 to end-2019 were analysed for the European continent split into seven regions based on the currency of exchange. Additionally, the following abnormal COVID-19 year, 2020, was analysed as an acid test of the ESG alpha hypothesis.

Overall, the tests offer empirical evidence that high portfolio ESG has the potential to enhance returns and / or reduce volatility over the long term and thereby improve the quality of portfolios. This evidence signifies the impact of the degree of equity portfolio ESG on performance. The Eurozone was a major exception to the test findings, as were the value weightings. Equal weighting stood out as the most coherent strategy for best-in-class positive ESG screened portfolios, both in terms of volatility and returns. Fama-French modelling yielded interesting region-specific insights for best-in-class positive ESG screening. The UK stood out as the most favourable region for beating the market with best-in-class positive ESG screening in the long run and passed the acid test of ESG outperformance during the identified black swan event for all three portfolio weightings in the short-term.

Optimizing ESG Portfolios

Jorge Hernandez — 2026-02-27

This research paper presents an advanced mathematical framework for constructing an environmentally,
socially, and governance (ESG) compliant investment portfolio. The study integrates the Black-Litterman
model [1], quadratic programming [2], and mGARCH-based covariance estimation [3] to address the dual
objectives of risk mitigation and return maximization within the ESG investment landscape. The
Black-Litterman model enables the incorporation of subjective investor views, enhancing the efficacy of
portfolio allocation. This approach aids in reducing estimation errors[5] and provides a flexible mechanism
to fine-tune investment decisions, thereby aligning with the investor’s risk appetite and ESG preferences.
In tandem with the Black-Litterman model, quadratic programming is employed to strike an optimal
balance between risk and return. This methodological combination offers a powerful toolset for crafting
portfolios that are not only ESG-compliant but also achieve competitive risk-adjusted returns[4].
Additionally, the study utilizes the mGARCH framework to estimate the covariance matrix, allowing for a
more accurate assessment of risk dynamics in the evolving market environment. By employing a
multi-dimensional approach to ESG constraints, encompassing environmental, social, and governance
criteria, the resulting portfolio construction process ensures alignment with sustainable investing principles.
Empirical validation on diverse market datasets underscores the effectiveness of this integrated approach,
offering valuable insights for ESG-conscious investors navigating the complexities of modern financial
markets.

ESG and Margins

Haim A. Mozes — 2026-02-27

This paper has two key results. First, ESG scores are negatively related to EBITDA margins for both larger and smaller stocks. For mid and small sized companies with high ESG scores, lower EBITDA margins are driven by higher general and administrative costs and lower gross margins, while for large companies with high ESG scores, lower EBITDA margins are driven by higher general and administrative costs. Second, analysts’ recommendations are negatively related to ESG scores. However, for the subsample with high EBITDA Margins, analysts’ recommendations are not negatively related to ESG scores. The implication is that analysts do not view high ESG scores as a negative investment attribute if EBITDA margins are high. The overall conclusion is that while ESG activities may benefit society, shareholders bear the cost of these ESG activities.

Impact IRR: Leveraging Modern Portfolio Theory to Define Impact Investments

Daniel Soliman — 2026-02-27

The impact investment market has an estimated value of over $1 trillion. Significant progress has been made in determining the financial returns of impact investing; however, investors are still in the early stages of determining impact return. In this study, the author proposes the use of Impact IRR to evaluate and monitor impact investments. This approach, which utilizes components of modern portfolio theory, adapted financial tools, and existing datasets, is demonstrated herein through initial use cases and examples showing how it can be employed to optimize impact.

Global Infrastructure PE Fund Performance: Does ESG Matter?

Victor Ong — 2026-02-27

Using key performance indicator (KPI) scores from data and insights provider Preqin, we assess the performance of global infrastructure private equity (PE) funds that have achieved higher environmental, social, and governance (ESG) scores. Using Ordinary Least Squares (OLS) regression analysis, we find that funds with higher ESG scores achieve better performance over the 1994–2022 period. Our findings are robust when the net internal rate of return (net IRR) and total value over paid-in (TVPI) are used as proxies for infrastructure PE fund performance. Furthermore, industry diversification and fund size attenuate the outperformance of high ESG funds. The results are robust by using subcomponents of country-level ESG ratings as the instrumental variables. Our results contribute to the debate on the performance of socially responsible investing funds and provide further validation for PE fund managers to incorporate ESG considerations into the investment process.

Balancing Financial and Sustainable Objectives in Sovereign Bond Portfolios using Multi-Objective Optimization

Emilio Rodríguez — 2026-02-27

This article introduces a novel model that explores how sustainability impacts asset allocation decisions, based on the objectives and preferences of investors who aim to maximize both financial and non-financial targets simultaneously. By applying various utility functions and levels of risk aversion, we analyze how market information, along with investor preferences, influence their portfolio allocation.

A Multi-Objective Optimization approach using a Non-Dominated Sorting Genetic Algorithm II is implemented to generate the Pareto front of non-dominated portfolios. An optimal solution is then selected through various Multicriteria Decision Making Methods.

The framework is applied to a portfolio of international sovereign bonds by integrating climate and financial returns. It demonstrates how different investor profiles lead to varied portfolio compositions and illustrates that sustainability objectives can not only coexist with financial goals, but they could also enhance portfolio performance.

Our research provides a robust framework for institutional investors to balance financial, diversification and sustainability goals, tailored to different investor preferences which makes it highly applicable in both asset management and the mutual fund industry.

Does Social Disclosure Mitigate the Information Disadvantage of Foreign Investors? An Empirical Study Using the Thomson Reuters ASSET4 Database

Rahma DRISS — 2026-02-27

We examine whether social disclosure affects the valuation decision of foreign investors. This research aims to answer a crucial question: Does the practice of societal disclosure reduce the fear of insufficient information among foreign investors, and does it encourage them to invest in socially responsible companies? This issue has already been addressed in various studies conducted in both emerging and developed contexts.

Our study covers a six-year period, from 2018 to 2023, and is based on a sample of 666 companies from France, the United States, and the United Kingdom. The data were collected from the renowned Thomson Reuters ASSET4 (Datastream) database.

The empirical analyses conducted reveal that adopting a societal disclosure strategy in corporate annual reports has a highly negatively significant impact on foreign investments.

For future research, we recommend exploring this issue in different contexts and incorporating additional variables. Such efforts could yield new insights and deepen our understanding of the relationship between societal disclosure and foreign investments.