From Ratings to Returns: Exploring the Impact of ESG Ratings on Portfolio Returns in Egypt

This paper aims at investigating the impact of Environmental, Social, and Governance (ESG) scores on portfolio performance within the Egyptian market in the period from January 2020 to December 2022. Drawing on ESG scores sourced from the Egyptian stock exchange and the Refinitiv-Eikon database, portfolios are created by ranking individual stocks from highest to lowest based on their ESG (Environmental, Social, and Governance) scores. To construct the portfolios, all stocks are initially ranked in descending order based on their ESG scores. Subsequently, the top 45% of stocks with the highest ESG scores are allocated to the "Top" portfolio, while the bottom 45% of stocks with the lowest ESG scores are assigned to the "Bottom" portfolio. The performance of a total of eight   portfolios were then analyzed utilizing capital asset pricing model (CAPM) and portfolio performance-based evaluation measures. Descriptive statistics and risk-adjusted portfolio performance measures revealed a consistent trend of underperformance across ESG categories among the portfolios constructed. Further analysis employing the Capital Asset Pricing Model (CAPM) provided insights into portfolio returns relative to market expectations. While some portfolios displayed positive performance indicators, overall findings underscored highlighting the need for reevaluation and potential adjustments in investment strategies to better align with desired ESG objectives and enhance portfolio performance. This research contributes to the growing literature on sustainable investing in Egypt, emphasizing the importance of incorporating ESG considerations into investment decisions for long-term financial sustainability.