Does ESG compliance lower the sensitivity of portfolio strategies to global macroeconomic risk factors?

This paper investigates whether ESG-integrated portfolio strategies provide superior risk-return trade-offs and distinct exposures to global macroeconomic risk factors compared to their non-ESG counterparts. Using a sample of 54 value, size, and momentum portfolios constructed across six major equity markets from June 2001 to June 2023, we evaluate performance and risk pricing through both descriptive statistics and a two-step cross-sectional asset pricing model à la Black, Jensen, & Scholes (1972). Empirical results show that ESG integration tends to modestly reduce average returns and Sharpe ratios, particularly for value and momentum strategies, though these effects are rarely statistically significant. More consistently, ESG strategies exhibit lower volatility, especially in developed markets such as the U.S., U.K., and Continental Europe, suggesting a potential shift toward a greater portfolio resilience. In the asset pricing tests, industrial production growth and term spread are significantly priced in both ESG and non-ESG portfolios, albeit with slightly lower estimated prices in ESG strategies. Notably, the Environmental Performance Index (EPI) factor is priced negatively and significantly in both samples with a stronger effect in non-ESG portfolios, indicating that weak environmental performance constitutes a priced source of systematic risk. Furthermore, the default spread is significant only in the ESG sample, possibly reflecting greater vulnerability to credit conditions due to the operational costs associated with sustainability compliance. Overall, our findings suggest that ESG integration reshapes the exposure of factor-based portfolios to global macroeconomic risks, not necessarily by enhancing returns, but by reprioritizing risk control and sustainability alignment. These results contribute to the ongoing debate on the financial relevance of ESG investing and highlight the importance of macroeconomic context in evaluating ESG performance.