Scientific Beta Study Shows that ESG Investors Face Significant Fund Selection Risk

Press Release - February 22, 2024

Scientific Beta Study Shows that ESG Investors Face Significant Fund Selection Risk

Study finds significant performance dispersion in the ESG strategy space

A new study from Scientific Beta, entitled "From ESG Confusion to Return Dispersion: Fund Selection Risk is a Material Issue for ESG Investors", examines the performance dispersion of a set of ESG funds invested in US stocks. The findings show substantial performance disparities in these ESG funds:

Over a six-year period, the difference in annualised returns between the best and worst ESG funds is 6.5% when adjusting for differences in market exposure.When removing effects due to differences in industry exposure, the difference remains high at 4.9%.Over single years, the dispersion can be even more dramatic, reaching a maximum of 22.5% in terms of returns adjusted for market exposures, and 25.3% in terms of industry-adjusted returns.

Commenting on the study, Felix Goltz, co-author, and Research Director at Scientific Beta, said, "The large dispersion in returns shows that fund returns are not principally driven by a common sustainability factor. Instead, fund returns largely depend on fund-specific choices of how to integrate ESG information. This suggests that ESG investors face substantial fund selection risk. Importantly, traditional fund selection strategies like relying on past performance or tracking error are inadequate for predicting future ESG fund performance. Our evidence emphasises that inconsistencies in ESG approaches contribute to significant dispersion in the performance of ESG investment products. Investors need to be aware that fund selection risk is a material issue for sustainable investment strategies."

The Scientific Beta study can be accessed here:

From ESG Confusion to Return Dispersion: Fund Selection Risk is a Material Issue for ESG Investors, Scientific Publication, February 2024

About Scientific Beta:
Scientific Beta aims to be the first provider of a smart factor and ESG/climate index platform to help investors understand and invest in advanced factor and ESG/climate equity strategies. Established by EDHEC-Risk Institute, one of the top academic institutions in the field of fundamental and applied research for the investment industry, Scientific Beta shares the same concern for scientific rigour and veracity, which it applies to all the services that it offers investors and asset managers.
On January 31, 2020, Singapore Exchange (SGX) acquired a majority stake in Scientific Beta. SGX is maintaining the strong collaboration with EDHEC Business School, and principles of independent, empirical-based academic research, that have benefited Scientific Beta's development to date. Since 2015, Scientific Beta has also been offering highly advanced strategies in the area of ESG and climate change, whether involving options integrated into smart beta indices or pure ESG or climate benchmarks.

As a complement to its own research, Scientific Beta supports an important research initiative developed by EDHEC on ESG and climate investing and cooperates with V.E and ISS ESG for the construction of its ESG and climate indices.

Scientific Beta, 2 Shenton Way, #02-02, SGX Centre I, Singapore 068804. For further information, please contact:
contact@scientificbeta.com, Web: www.scientificbeta.com

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