ESG Ratings and Investment Returns at the Country Level: Does Higher Mean Better?

Dimitrios Asteriou, Keith Pilbeam, Ioannis Litsios and William Pouliot

International Journal of Finance & Economics, 2025, vol. 30, issue 4, 3761-3784

Abstract: We examine whether U.S. dollar‐based investors can do better investing in highly rated ESG countries than in medium and lower rated ESG countries using both cross sectional and panel data estimations. In general, we find evidence that investment in ESGLow scoring countries leads to better returns than investing in ESGHigh scoring countries which in turn provide better returns than investing in ESGMedium scoring countries. We also examine the issue of risk‐adjusted excess returns using a variety of country risk‐adjusted returns including the country‐level Sharpe ratio, Treynor ratio and Alpha. In general, we find that ESGLow countries still outperform ESGHigh countries who in turn outperform ESGMedium countries. We also find that countries that have improved their ESG scores over the period 2000–2021 have tended to provide the best returns for international investors and this group is mainly made up of ESGLow countries, although this is likely driven mainly by their higher economic growth rates. Finally, we examine the performance within the groups of ESGHigh, ESGMedium and ESGLow countries. In each case, we find that there is a positive relationship of returns with ESG scores within the group, and that GDP per capita in levels has a negative impact on returns using both the market exchange rate and purchasing power parity measures.

Date: 2025
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