ESG Portfolio Construction and Performance Analy sis: Evidence from an Australian Equity Portfolio Compared with an Ethical ETF Benchmark.

Abstract

This study investigates at how an equity portfolio with an environmental, social, and governance (ESG) focus is built and performs in the Australian market. The portfolio was created with a methodical approach that includes ESG screening, sector diversification, and an equal-weighting strategy for 10 ASX-listed businesses with low ESG risk ratings. The research is based on Modern Portfolio Theory and ESG investment principles, and it seeks to determine if sustainable investment methods can produce competitive financial returns. Portfolio performance was analysed from August 25 to September 19, 2025, and compared to the Vanguard Ethically Conscious Australian Shares ETF (VETH). The results show that the ESG portfolio beat the benchmark, producing a positive return while the benchmark experienced a tiny decline. This outperformance was predominantly driven by strong increases in growth-oriented and innovation-focused companies, emphasising the significance of active stock selection in ESG frameworks. Risk analysis shows that diversification and equal weighting helped to manage volatility, whereas ESG screening reduced exposure to enterprises with high sustainability risks. However, the study recognises several limitations, such as the short evaluation time and reliance on a single ESG data provider. In general, the data indicate that ESG integration can help with both financial performance and risk management, highlighting its growing importance in modern portfolio construction.