Anti-ESG Portfolio Performance?

Should investors expect materially different returns for stocks accepted or excluded by institutional investors based on firm environmental, social and corporate governance (ESG) policies and practices? In their April 2022 paper entitled “The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway’s Oil Fund”, Erika Berle, Wangwei He and Bernt Ødegaard analyze aggregate performance of stocks excluded by the Norwegian Government Pension Fund Global portfolio based on ESG-related conduct or products, used as a model by many institutional investors. They construct various equal-weighted (EW) and value-weighted (VW) portfolios of excluded stocks and measure returns and Fama-French 5-factor (market, size, book-to-market, profitability and investment) alphas of these portfolios. Using monthly returns in U.S. dollars and firm data for a sample of 186 excluded stocks, with some exclusions revoked, during 2005 through early 2022, they find that:

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