Investors searching for alpha—to beat the market—won’t find it in socially responsible investing. A recent study examining a decade of data reveals that portfolios of exchange-traded funds (ETFs) following environmental, social, and governance (ESG) investing strategies did not outperform standard index funds.
The study conducted by Scientific Beta, a consultancy associated with France’s EDHEC Business School, found that ESG ETF funds underperformed by an average of 0.2% annually compared to a proxy for the US equity market.
Only in 2020 did ESG ETFs stand out, outperforming by 4.2%. This was primarily due to their exposure to red-hot technology stocks, which contributed more than half of the overperformance against the broad benchmark index.
However, one good year does not establish a trend. The study concluded that both average relative returns and capital asset pricing model alpha, a measure of excess returns over a benchmark, have been close to zero over the past decade.
What is a socially conscious investor to do?
Giovanni Bruno, a co-author of the Scientific Beta study and the group’s senior quantitative researcher, suggests that socially conscious investors should not shy away from investing in this space.
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