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Recent interest in sustainability has led to an increasing number of investors, both individual and professional, who want to be able to invest more sustainably and to meet this demand regulations have been created to increase the transparency of financial instruments. This has resulted in the creation of new tools and changes made to existing financial products to meet these new expectations. One common method to measure sustainability efforts is through the Environmental, Social, and Governance (ESG) factors.

This thesis investigates whether ESG sustainability efforts impact the returns of equity market investments, focusing on portfolio construction and index funds. Portfolios were created using the best and worst ESG-rated stocks, drawn from large indexes such as OMX and MSCI, over a four-year period. The results indicate that portfolios with lower ESG ratings have higher expected returns. Out of the three investment strategies—Sharpe ratio, equal weight, and risk parity—the equal weight strategy had the highest returns, while the Sharpe ratio strategy had the lowest volatility.

In response to the demand for more sustainable funds, index funds have been adjusted by excluding stocks not considered sustainable, altering their composition and causing deviations from their indexes. 13 funds and their corresponding indexes were analysed for deviations, measured by the extent to which the funds diverge from their indexes. Simulation was used to generate a distribution of deviations for each fund. It was found that all funds deviate from their indexes, with deviations varying in direction and generally being larger in cases when the index is priced higher than the fund.