The Evolution of Sustainable Investing and Its Effect on Portfolio Risk-Return Profiles in Capital Markets

Abstract

Sustainable investing, also referred to as environmental, social, and governance (ESG) investing, has transitioned from a niche practice to a mainstream strategy in global capital markets. Traditionally, investment frameworks prioritized financial returns while externalities such as environmental degradation, labor rights, and corporate governance were overlooked. Over the last three decades, however, the paradigm has shifted significantly. Investors increasingly recognize that ESG considerations can influence firm value, market stability, and long-term financial performance. This article examines the evolution of sustainable investing, highlighting its emergence through ethical investing in the 1960s, expansion during the 1990s with socially responsible investing (SRI), and consolidation in the 21st century under ESG frameworks.The analysis specifically evaluates how sustainable investing affects portfolio risk-return profiles. Empirical and theoretical evidence suggests that portfolios integrating ESG criteria often achieve competitive or superior returns compared to conventional investments while exhibiting reduced downside risks. This is primarily attributed to improved corporate governance, lower reputational risks, and enhanced adaptability to regulatory and market changes. However, critics argue that ESG integration may lead to constrained diversification and potential opportunity costs.