The Eco-Efficiency Premium Puzzle explores whether socially responsible investing (SRI) leads to superior portfolio performance. The study uses Innovest Strategic Value Advisors' corporate eco-efficiency scores to construct and evaluate two equity portfolios differing in eco-efficiency. The high-ranked portfolio significantly outperformed the low-ranked one from 1995–2003, with performance differences not explained by market sensitivity, investment style, or industry factors. Results remained significant across various transaction cost levels, suggesting SRI can yield substantial incremental benefits. The study addresses the debate over whether SRI adds value to stock selection. While some argue that ethical standards increase costs and reduce profitability, others believe improved social or environmental performance enhances input-output efficiency or creates new market opportunities. The paper investigates whether corporate social or environmental responsibility is linked to financial performance, using empirical data from socially responsible mutual funds compared to conventional funds or market indexes. The study uses Innovest's eco-efficiency ratings to evaluate self-composed equity portfolios, avoiding the limitations of mutual fund studies. It applies performance attribution models to test if performance differences are significant and attributable to environmental factors. The study controls for multiple non-environmental factors, including size, value versus growth, and momentum effects, using a four-factor model augmented by industry effects. The paper finds that environmentally responsible companies tend to outperform less responsible ones, with the high-ranked portfolio showing a positive Jensen's alpha. The results are robust to various transaction cost scenarios and remain significant even after controlling for market risk, investment style, and industry effects. The study suggests that SRI can provide incremental benefits over long-term horizons, as evidenced by the superior performance of the best-in-class portfolio compared to the worst-in-class portfolio. The findings challenge the notion that SRI leads to suboptimal returns, as the performance differential remains significant even after adjusting for various factors. The study highlights the importance of considering environmental criteria in investment decisions, as they can contribute to long-term investment returns. The results suggest that the eco-efficiency premium is a real and significant phenomenon, despite the challenges in explaining it within traditional risk-return frameworks. The study concludes that SRI can provide substantial benefits, and further research is needed to explore the long-term effects of SRI on investment returns.The Eco-Efficiency Premium Puzzle explores whether socially responsible investing (SRI) leads to superior portfolio performance. The study uses Innovest Strategic Value Advisors' corporate eco-efficiency scores to construct and evaluate two equity portfolios differing in eco-efficiency. The high-ranked portfolio significantly outperformed the low-ranked one from 1995–2003, with performance differences not explained by market sensitivity, investment style, or industry factors. Results remained significant across various transaction cost levels, suggesting SRI can yield substantial incremental benefits. The study addresses the debate over whether SRI adds value to stock selection. While some argue that ethical standards increase costs and reduce profitability, others believe improved social or environmental performance enhances input-output efficiency or creates new market opportunities. The paper investigates whether corporate social or environmental responsibility is linked to financial performance, using empirical data from socially responsible mutual funds compared to conventional funds or market indexes. The study uses Innovest's eco-efficiency ratings to evaluate self-composed equity portfolios, avoiding the limitations of mutual fund studies. It applies performance attribution models to test if performance differences are significant and attributable to environmental factors. The study controls for multiple non-environmental factors, including size, value versus growth, and momentum effects, using a four-factor model augmented by industry effects. The paper finds that environmentally responsible companies tend to outperform less responsible ones, with the high-ranked portfolio showing a positive Jensen's alpha. The results are robust to various transaction cost scenarios and remain significant even after controlling for market risk, investment style, and industry effects. The study suggests that SRI can provide incremental benefits over long-term horizons, as evidenced by the superior performance of the best-in-class portfolio compared to the worst-in-class portfolio. The findings challenge the notion that SRI leads to suboptimal returns, as the performance differential remains significant even after adjusting for various factors. The study highlights the importance of considering environmental criteria in investment decisions, as they can contribute to long-term investment returns. The results suggest that the eco-efficiency premium is a real and significant phenomenon, despite the challenges in explaining it within traditional risk-return frameworks. The study concludes that SRI can provide substantial benefits, and further research is needed to explore the long-term effects of SRI on investment returns.