Risk and Return Characteristics of Environmental, Social, and Governance (ESG) Equity ETFs

Abstract

Environmental, social, and governance (ESG) ETFs attract investors who are driven by their personal values in investing, but also by investors who believe that ESG investing will produce a favorable return–risk trade-off. This article looks at the risk and return characteristics of ESG ETFs since their inception (February 2005) through July 2019 and compares them with investable proxies for US (Russell 3000 ETF—IWV) and global (SPDR^® Global Dow ETF—DGT) equity markets. Using absolute and risk-adjusted performance measures, the author finds that equal- and value-weighted ESG portfolios outperformed the IWV and DGT in some periods and underperformed in others. However, during the entire period, IWV and DGT outperformed ESG portfolios and had higher absolute- and risk-adjusted performance.

TOPICS: Exchange-traded funds and applications, ESG investing, mutual fund performance

Key Findings

• • Environmental, social, and governance (ESG) ETFs attract investors who are driven by their personal values in investing, but also by investors who believe that ESG investing will produce a favorable return–risk trade-off.

• • This article looks at the risk and return characteristics of ESG ETFs since their inception (February 2005) through July 2019 and compares them with the US (Russell 3000 ETF—IWV) and global (SPDR^® Global Dow ETF—DGT) equity markets.

• • The period of study is divided into two bull markets (February 2005 to September 2007 and April 2009 to July 2019) and one bear market (October 2007 to March 2009). ESG portfolios outperformed IWV and DGT in some periods and underperformed in others. However, during the entire period, both IWV and DGT outperformed ESG portfolios, with higher absolute- and risk-adjusted performance.

• • Results indicate that investors can definitely allocate a portion of their portfolios toward their desired ESG investment, as it would help them diversify and lower risk.