A new study from Scientific Beta – assessing the performance of sustainable investing from a value-weighted portfolio of exchange-traded funds (ETFs) that follow systematic ESG investing strategies in the US equity market – has found that sustainable investing did not deliver higher returns than standard index funds.

The research – Sustainability alpha in the real world: Evidence from exchange-traded funds – noted that over the past decade, such periods of outperformance were 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.

Breaking down the performance in shorter time periods – the last 10 calendar years – the study identified one year (2020) characterised by a large outperformance over the market: 4.2% in relative returns and Capital Asset Pricing Model (CAPM) alpha.

However, this short-term extra-performance represents just a statistical outlier. In addition, even this outlier is mostly due to sector-biases rather than to the ESG-tilt of the sustainable ETFs, the report showed. 

Overall, according to the report, the evidence from real-world investment products shows that sustainability did not generate “sustainability alpha” over the past decade.

The authors of the report – Giovanni Bruno, senior quantitative analyst, and Felix Goltz, research director – said that in recent years, there has been a growing interest in sustainable investing, which integrates non-financial considerations such as ESG criteria in investment decisions.

“A key concern for all investors is whether integrating non-financial considerations has an impact on financial performance. However, assessing the realised impact on performance is difficult due to the existence of disparate approaches to define and capture sustainability,” they said.

Goltz added: “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.”

He said the 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,” Goltz noted.

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