STOCKS PORTFOLIO CONSTRUCTION AND EVALUATION INCORPORATING ESG CRITERIA

Abstract

This article analyzes the impact of ESG criteria integration on stock portfolio formation outcomes in the Nasdaq Baltic market. Although ESG investing has attracted academic and practical attention in recent years, empirical evidence remains inconclusive, particularly in smaller capital markets. The aim of the study is to construct and evaluate a stock portfolio incorporating ESG criteria and to compare its performance with a minimum risk portfolio and a market index. The portfolios were constructed using the Markowitz Mean–variance model, supplemented with ESG score integration in the optimization process. Portfolio performance was evaluated using return and risk indicators, while the statistical significance of differences was tested using a two-sample t-test and an F-test. The results show that ESG integration during the analyzed period did not generate a statistically significant return advantage and did not reduce portfolio risk compared to the benchmark portfolios. Although the ESG portfolio demonstrated lower sensitivity to market fluctuations, this did not become into a more efficient risk–return relationship. The findings suggest that ESG integration in the Baltic market did not provide a clear financial advantage in the short term. These results may be relevant for investors and portfolio managers assessing the financial justification of ESG integration in small capital markets.