Scientific Beta: Sustainable investing underperforms standard index funds

Scientific Beta: Sustainable investing underperforms standard index funds

October 2, 2023

ESG-investing
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A new study from Scientific Beta, entitled 'Sustainability Alpha in the Real World: Evidence from Exchange-Traded Funds', assesses the performance of sustainable investing from a value-weighted portfolio of exchange-traded funds (ETFs) that follow systematic Environmental, Social, and Governance (ESG) investing strategies in the US equity market.

The study finds that sustainable investing did not deliver higher returns than standard index funds. Widely commented periods of outperformance, such as the year 2020, can be explained in large part by industry effects, such as a tilt towards technology stocks. Over the past decade, such periods of outperformance are offset by corresponding periods of underperformance, leaving ESG investors with returns of -0.2% compared with the market index and -0.7% compared with a benchmark with matching industry exposure.

Commenting on the study, Felix Goltz, co-author, and Research Director at Scientific Beta, said, 'For investors looking to integrate ESG objectives in their investment process, it is crucial to question what impact this would have on their portfolio's financial performance. The existence of numerous methodologies to integrate sustainability, which may not be representative of actual practice, has made it challenging to assess this impact empirically. Our study provides an assessment of the 'real-world' performance of sustainable investing, drawing on information from the market of exchange-traded funds. We encourage investors to consider such 'real-world' results and be aware of the limitations of analysis that selects particular funds or creates stylised strategies that may not reflect the real world of sustainable investing.'

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