Sustainable investing falls short of standard index funds, new study reveals

Research indicates 'real-world' ESG performance lacks distinction

Sustainable investing falls short of standard index funds, new study reveals

A new study by Scientific Beta has examined the performance of sustainable investing using a portfolio of exchange-traded funds (ETFs) following systematic Environmental, Social, and Governance (ESG) strategies in the US equity market. The study found that sustainable investing did not yield higher returns compared to standard index funds.  

Periods of superior performance, such as in 2020, were largely attributed to industry factors like an inclination towards technology stocks. The study highlights that this short-term boost was a statistical outlier, mainly attributed to sector-specific biases rather than the ESG tilt of sustainable ETFs. 

Over the past decade, these moments of outperformance were balanced by periods of underperformance, resulting in ESG investors experiencing returns of -0.2% when compared to the market index and -0.7% compared to a benchmark with matching industry exposure. 

Felix Goltz, co-author of the study and research director at Scientific Beta, emphasized the importance of considering the financial impact when integrating ESG goals into investment strategies. “It is crucial to question what impact this would have on their portfolio’s financial performance,” he said.  

In recent years, there has been a growing interest in sustainable investing, which integrates non-financial considerations like ESG criteria into investment decisions. However, assessing the actual impact on financial performance remains challenging due to varying approaches.  

“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,” Goltz continued. “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 stylized strategies that may not reflect the real world of sustainable investing.”