Firms that score high on environmental, social, and governance (ESG) indicators exhibit lower expected returns. This negative ESG premium might be driven by the lower risk associated with high ESG scores (betas), or it could signal investors’ preferences for firms with high ESG scores (characteristics). We show that ESG as a characteristic mainly drives the premium. Specifically, a one standard deviation increase in the ESG characteristic is associated with a decrease in expected returns of 2.73% annually. In addition, the ESG characteristic explains a higher proportion of the cross-sectional variation in expected returns compared to ESG betas. We further caution for the presence of an ESG bias within the ESG premium that is due to positive realized returns preceding lower long-term expected returns. When correcting our estimates for the ESG bias the decrease in expected returns turns out to be 3.41% on an annual basis. The ESG bias correction, together with a firm-level methodology, can help clarify the mixed findings documented in the literature.