DOES ESG PERFORMANCE IMPROVE STOCK RETURNS? A SYSTEMATIC REVIEW OF EVIDENCE, MECHANISMS, AND CONTEXT

Abstract

This study examines how Environmental, Social, and Governance (ESG) performance influences stock returns across different market conditions and firm characteristics. Using a systematic literature review based on PRISMA guidelines, this study synthesizes empirical evidence from 32 Scopus-indexed studies published between 2016 and 2026. The findings indicate that the relationship between ESG performance and stock returns is heterogeneous and context-dependent. While several studies report that ESG improves stock resilience, reduces downside risk, and supports better market performance during periods of crisis or high uncertainty, others find insignificant or negative effects, particularly in stable market conditions or in the short term. The results show that ESG effectiveness is shaped by market conditions, firm size, sectoral exposure, ESG measurement approaches, and methodological design. ESG appears to function more strongly as a risk mitigation and resilience mechanism than as a consistent source of abnormal returns. This study contributes to the sustainable finance literature by providing a structured synthesis of ESG–stock return evidence and highlighting the importance of contextual factors in explaining mixed empirical findings. The findings also offer practical insights for investors, portfolio managers, and policymakers in integrating ESG considerations into investment decision-making and risk management.