ESG improvement as a critical driver of improved shareholder returns: A study of comparative portfolios

• Sustained ESG rating improvements matter more than static, one-off improvements. • ESG Improvers portfolios consistently exhibit strong risk-return profile. • Governance improvements drive resilience during market stress. This study explores the link between environmental, social, and governance (ESG) rating improvements and stock performance. Building a portfolio of stocks that showed sustained ratings improvement from 2019-2023, we find that this “ESG Improvers” portfolio delivers superior returns compared with randomly constructed portfolios, portfolios composed of companies with unchanged ESG ratings, and the ASX200 and S&P500 indices. Firms with stable or declining ESG ratings tend to underperform, while ESG Improvers consistently exhibit a stronger overall risk–return profile. These findings confirm the view that only sustained ESG improvements are related to stock performance and highlight the need for investors to actively scrutinize one-off ESG rating improvements.