Value creation with passive socially responsible exchange-traded funds

Abstract

Using a unique data set of 121 U.S. equity ETFs from January 2010 to December 2020, this thesis studies whether passive socially responsible exchange-traded funds overperform their passive counterpart that does no socially responsible screening. Further, this thesis examines what are the strategies (inclusion or exclusion) and attributes (ESG and product-related) that drive the performance results.

Socially Responsible Investing (SRI) has grown substantially during recent years in asset size and as products that incorporate the idea of “doing good while doing well.” Socially responsible investing seeks to deliver returns while evaluating the long-term impact of a company’s business policies on society and on the environment. Mutually exclusive, the exchange-traded funds (ETFs) are growing substantially in assets under management and product offering. While expensive active asset management steers investors towards passive and less expensive alternatives, the ETFs offer a transparent and cost-efficient way to practice different investing styles like the SRI. The SRI ETFs are a recent financial innovation, academic interest is emerging, and this thesis intends to fill it by examining the existing literature of SRI and ETFs individually and combined.

The empirical part of this thesis provides answers for investors considering SRI ETFs. An equally weighted SRI ETF portfolio underperforms the passive counterpart of an equally weighted portfolio of passive S&P500 ETFs significantly on the longest sample period of January 2010 to December 2020. However, the periods after January 2015 offer distinctive results as the SRI ETF portfolio overperforms the counterpart. It seems to be relating to the development of SRI ETFs that substantially grew in asset size and products after 2015. Furthermore, it seems to be the ETFs using Environmental Inclusion (positive screening) as a strategy that drives the SRI ETF sample group abnormal returns. The ETFs using Environmental Inclusion overperform the other screening strategies statistically and economically significantly.

This thesis provides evidence that financial performance does not consistently exclude sustainable performance and that by choosing a passive socially responsible ETF, investors can “do good while doing well.”