Environmental, Social and Corporate Governance Factors and the Investor's Efficient Frontier

Socially responsible investing (SRI) has been a common practice since the late 1980s. At the beginning, academics, practitioners and the public have asked if the ESG integration process hurt investment returns. The answer to this question depends on the future growth of ESG screening process and rating data. If research shows that there is no significant difference in returns between a portfolio without ESG constraint and a portfolio with ESG constraint, SRI will be appealing to investors who allow peace of mind knowing that they are invested in socially responsible companies. If it is shown that ESG portfolios produce superior returns, SRI will become mainstream and traditional investors will begin integrating ESG factor. Our research paper suggests that ESG investors are not efficient or rational investors based on the modern portfolio theory, and there is no evidence confirming that the benefit of ESG integration outweighs the loss of portfolio efficiency.