Buyer Beware: The Paradox of ESG &amp;amp; Passive ESG Funds

Reiser, Dana Brakman; Tucker, Anne M.

doi:10.2139/ssrn.3440768

Cited by 2 publications

(2 citation statements)

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“…expense ratio between 25 and 150 basis points which are slightly lower than in the studies (50 and 200 basis points). In fact, these expense ratios are in line with what Alda [122] and Brakman Reiser-Tucker [123] found typical nowadays for ESG ETFs. The expense-adjusted portfolio return is the ESG-themed megatrend return minus the sum of transaction costs.…”

Section: Plos Onesupporting

confidence: 89%

“…The impact of transaction costs is an essential consideration in assessing the profitability of trading strategies [121]; therefore, we analysed the ESG-themed megatrend portfolios after controlling for costs and fees. We concentrate on the expense ratio, as did two recent studies [122,123]. We follow the method of Derwall et al and Kemp-Osthoff [124,125] assuming an…”

Section: Plos Onementioning

confidence: 99%

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Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

Naffa

Fain

2020

PLoS ONE

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ESG factors are becoming mainstream in portfolio investment strategies, attracting increasing fund inflows from investors who are aligning their investment values to Sustainable Development Goals (SDG) declared by the United Nations Principles for Responsible Investments. Do investors sacrifice return for pursuing ESG-aligned megatrend goals? The study analyses the risk-adjusted financial performance of ESG-themed megatrend investment strategies in global equity markets. The analysis covers nine themes for the period 2015–2019: environmental megatrends covering energy efficiency, food security, and water scarcity; social megatrends covering ageing, millennials, and urbanisation; governance megatrends covered by cybersecurity, disruptive technologies, and robotics. We construct megatrend factor portfolios based on signalling theory and formulate a novel measure for stock megatrend exposure (MTE), based on the relative fund flows into the corresponding thematic ETFs. We apply pure factor portfolios methodology based on constrained WLS cross-sectional regressions to calculate Fama-French factor returns. Time-series regression rests on the generalised method of moments estimator (GMM) that uses robust distance instruments. Our findings show that each environmental megatrend, as well as the disruptive technologies megatrend, yielded positive and significant alphas relative to the passive strategy, although this outperformance becomes statistically insignificant in the Fama-French 5-factor model context. The important result is that most of the megatrend factor portfolios yielded significant non-negative alphas; which supports our assumption that megatrend investing strategy promotes SDGs while not sacrificing returns, even when accounting for transaction costs up to 50bps/annum. Higher transaction costs, as is the case for some of these ETFs with expense ratios reaching 80-100bps, may be an indication of two things: ESG-themed megatrend investors were willing to sacrifice ca. 30-50bps of annual return to remain aligned with sustainability targets, or that expense ratio may well decline in the future.

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Section: Plos Onesupporting

confidence: 89%