As noted previously in this study, social responsibility as an investment feature and the ETFs are relatively new concepts in the field of finance. Nevertheless, they have substantially increased in recent history, and ETFs that are socially responsible are still few in numbers. There is inadequate data for greater time-series analysis of performance.
Hence, this study examines the last 11 years with the widest available data set and therefore tries to fill the gap between literature and the financial markets. Academic interest has even tough emerged, and few existing studies have examined these instruments. In this chapter, we summarize the theoretical part as combining these phenomena through existing literature.
5.1 Socially responsible ETFs
Although the first ETF, “The Spider”, was launched in 1993, it was only 15 years after when the first socially responsible ETF came around, MSCI USA ESG Select NR USD (KLD) was launched on January 28, 2005. Meziani (2014) explains the slow start with the overall slow start of ETFs. Once they began to attract investors, it was only a matter of time when social responsibility as a theme was integrated into ETFs. The first socially responsible ETF was primarily focused on ESG selection. (Meziani, 2014.)
Socially responsible ETFs are investment instruments that invest primarily in socially responsible assets, defined as stocks, commodities, or fields of industries that exhibit positive environmental, social, and governance (ESG) characteristics. Socially responsible ETFs are ETFs that hold a collection of socially responsible corporations (Chakrabarty &
Lee & Singh, 2017). As pointed out before, socially responsible investing can be called in many ways, and for example, Chakrabarty et al. (2017) study CSR-focused ETFs, and Sabbaghi (2011) studies “green ETFs” as both meaning socially responsible ETFs.
As demonstrated in the second chapter, the ETFs provide a cost advantage through low management fees and diversification through many assets they contain. Chakrabarty et al. (2017) describe socially responsible ETFs as good for investors who cannot identify specific socially responsible corporations that also perform well financially since the ETFs hold a collection of socially responsible assets. As the ETFs also being liquid and transparent, they generate a possibility for investors to participate markets efficiently.
5.2 Financial performance of socially responsible ETFs
Only a few existing studies are examining the value creation process of socially responsible ETFs and their effects on financial performance. These studies are presented next. However, all of the studies are limited to short time series and small sample sizes due to the recent emerging of these investment products, thus still forming all of the existing academic literature and samples of the subject.
Sabbaghi (2011) examines the recent emergence from the beginning of this phenomenon in January 2005 through October 2009, and the study is the first econometric investigation of these socially responsible ETFs. Data consists of 15 “green ETFs” that primarily invest in companies incorporating positive environmental, social, and governance (ESG) characteristics. Sabbaghi’s (2011) evidence suggests that a weak form of market efficiency exists, and market-wide “green” returns are generally uncorrelated over time. The sample median returns for the ETFs tend to be positive on a daily frequency. However, the study proves that these “green” returns are not immune to general market movements, like to the post-2008 financial crisis when market-wide
“green” returns became negative. Sabbaghi (2011) further advocates that socially responsible or “eco-efficient” actions undertaken by corporations lead to more stable financial returns, thereby decreasing subsequent volatility. This study provides further evidence that socially responsible investing through ETFs can generate better risk and return ratios, especially during market volatility. Nonetheless, socially sustainable ETFs are still prone to market risk, as demonstrated before.
Meziani (2014) measures whether ESG ETFs have the potential to add value relative to the more traditional investment mandates. ESG based strategy through ETFs is considered being effective if it delivers performance above the market. Meziani’s (2014) study consists of 21 samples that were existing in the overall ETF market during the research period from 2009 to 2013. A handful of the funds are able to track the performance of the benchmark closely. However, for most parts, the risk-adjusted performance of ESG ETFs lags compared to the benchmark. Meziani (2014) concludes that the performance of these ETFs seems to be way out of the risk taken to achieve returns. Despite the weak performance Meziani (2014) further presents that socially responsible ETFs will make serious strides as long as investors continue into incorporate them to their investment decision-making.
Chakrabarty et al. (2017) argue that whether corporate social responsibility (CSR) focused ETFs can add financial value for investors when also promoting socially conscious corporations. They argue that if promoting CSR involves a trade-off concerning investment results. Accordingly, to others, they suggest that socially responsible ETFs emerge as attractive for investors since they are funds that passively hold CSR corporations and have low management fees. Opposite results to Meziani (2014), Chakrabarty et al. (2017) suggest that socially responsible ETFs perform at least as well as their benchmark index, and some even outperform the corresponding benchmark.
Investors can so on except risk-adjusted returns at least similar to that of the market index when they invest in CSR-focused ETFs.
To conclude these studies, results vary between researchers, methods used, periods, and the ETFs selected. The socially sustainable ETFs lack on prior research and generates urgency for further research, because the ETFs may offer a cost-efficient way to access passive asset management strategies, thus creating more value for investors financially and on other parameters.