This study investigates the risk-adjusted performance contribution of ESG REITs and real estate companies from a portfolio management perspective by comparing the diversification benefit of investing in conventional real estate indexes compared to ESG real estate indexes. Using a sample of European REITs and real estate companies from January 2006 to September 2022, we construct a set of novel ESG real estate indexes and shed light on the effect of ESG real estate investments in the portfolio risk-adjusted performance, testing three different models. The results suggest that the performance of portfolios using different strategies and levels of ESG screening in the real estate asset class varied, with the portfolio with the most stringent ESG requirements for real estate having the highest levels of volatility and return and the real estate portfolios with environmental screening having the best risk-adjusted performance. However, a socially responsible real estate portfolio would produce valuable positive externalities as real estate drives almost 40% of global emissions.