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Societe Generale study finds some SRI ETFs could outperform traditional models


Some SRI ETFs could be good options to replace traditional world, emerging market and Eurozone ETFs finds a new report from Societe Generale into the SRI ETF sector.

Entitled ‘Shades of green – A review of SRI ETFs and 50 underlying benchmarks’, the report also found that by contrast, classic US equity ETFs remain more efficient than their SRI rivals.
Excluding Impact Investing, Thematics ETFs and Factor ETFs, there are 90 different products available in the US and Europe in the SRI space, Societe Generale says. This equates to 13.5 per cent of the long-only country/region equity ETF offer, cumulating at around USD26 billion in assets under management in aggregate at mid-August 2019.
The report notes that SRI has gained considerable traction in recent years, with an increasing number of investors motivated by non-wealth factors without sacrificing financial returns.
“Against this backdrop, the question of reconciling financial performance and corporate social responsibility have taken centre stage,” the report says.
Based on current ESG (Environmental, Social and Governance) scores and ratings, most recent studies demonstrate that ESG is not yet a factor. Better ESG scores could change this picture in the future but, for now, ESG cannot be considered as a source of additional risk or performance, says Societe Generale.
“But nor can it be considered as hurting risk-adjusted returns. For this reason, it is possible to turn a traditional strategy into an SRI-oriented strategy at no additional cost. This has led to the creation of hundreds of SRI indices in the passive management space.”
SRI indices used as ETF underlying benchmarks differ widely in terms of SRI approaches and index methodologies, but they broadly seem to share the same goals, i.e. minimising the deviations from their parent indices while maximizing their ESG ratings.
Soc Gen has identified all ESG-integration and exclusion-based ETFs domiciled in Europe and the US and analysed their underlying benchmarks with a Developed Market (DM), US, Emerging Market (EM), Europe and eurozone focus, i.e. 50 different SRI indices.
They then assessed the ESG representativeness of each index based on the SG ESG stock ratings designed by SG’s Sustainability Research team as well as their risk-return patterns.
“Our results show that almost all SRI indices enjoy higher ESG ratings with relatively similar risk-return patterns to their parent indices. More interestingly, several SRI indices exhibit a higher risk-adjusted return profile, especially in the Emerging Market segment.”
Soc Gen finds that if SRI and traditional indices have close risk-return patterns, then the question is whether SRI ETFs could be attractive alternatives to traditional country or region ETFs.
“In an attempt to answer this question, we estimate and compare the holding costs of SRI ETFs to non-SRI ETFs by applying the same methodology described in our previous reports. We found that some SRI ETFs offer higher risk-adjusted returns than traditional ETFs, together with competitive holding costs.”

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