Hidden Gem or Fool’s Gold: Can passive ESG ETFs outperform the benchmarks?

• Published in: International review of financial analysis 2023-03, Vol.86, p.102540, Article 102540
• Main Authors: Dumitrescu, Ariadna, Järvinen, Jesse, Zakriya, Mohammed
• Format: Article
• Language: English
• Subjects: Business administration; ESG; ETFs; Humanities and Social Sciences; Socially responsible investments; SRI; Sustainability
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2023.102540

Using a unique and extensive dataset of 121 socially responsible investing (SRI) equity exchange-traded funds (ETFs) from January 2010 to December 2020, this study examines how passive SRI ETFs perform compared with their non-SRI benchmarks composed of S&P500 ETFs. Over the full sample period, our results show that an equally weighted SRI ETF portfolio underperforms its benchmark portfolio. Notably, we do not find significant differences in the two portfolios’ performance in the second half of our sample period. However, in the last two years, the SRI ETF portfolio significantly outperforms the benchmark. For the SRI investment strategies, we show that positive screening (or inclusion) rather than negative screening (or exclusion) can beat the benchmark portfolio. In particular, environmental inclusion screen provides significantly higher abnormal returns. Finally, we find that SRI ETFs’ performance can be explained by increasing industry competition and declining market concentration. •Between 2010 and 2020, an equally weighted SRI ETF portfolio underperforms its benchmark portfolio.•However, in the last two years, SRI ETF portfolio significantly outperforms the benchmark.•Only positive screening (or inclusion), and particularly environmental inclusion screens, beat the market and provide significantly higher abnormal returns.•Increasing industry competition and declining market concentration explains SRI ETFs’ performance.