The Impact of ESG Screening on Risk-Adjusted Returns: Evidence from U.S. Equity ETFs

Abstract

This study investigates the impact of ESG ratings on the risk-adjusted performance of U.S. exchange-traded funds (ETFs). Specifically, it compares the iShares ESG Aware MSCI USA ETF (ESGU) and the iShares Core S&P 500 ETF (IVV) to examine whether an ESG-focused investment strategy can achieve superior financial outcomes relative to traditional market investing. Using daily data from 2017 to 2024, the study employs descriptive statistical analysis, comparative performance metrics, correlation analysis, and paired sample t-tests to evaluate differences in performance, volatility, and risk-adjusted returns between the two ETFs. Empirical results indicate that ESGU exhibits a slightly higher average return than IVV; however, this difference is economically small and statistically insignificant. From a risk perspective, ESGU shows marginally higher volatility, suggesting that ESG screening does not necessarily reduce overall market risk exposure. ESGU’s Sharpe ratio is slightly higher, indicating a modest improvement in return per unit of risk, although this advantage is also not statistically significant. Overall, the findings suggest that ESG screening does not meaningfully enhance or reduce investment performance in the U.S. equity ETF market. This study contributes to the literature by providing updated empirical evidence on ESG screening effectiveness in passive investment strategies and assessing whether ESG-focused ETFs can deliver competitive risk-adjusted returns compared to traditional benchmarks. The results offer practical implications for investors seeking to balance financial performance with sustainability objectives.