Sustainability Without Sacrifice: A Quantitatove Assessment of Financial Performance and Sector Exposure in European ESC ETFs

Abstract

In the previous decade, sustainable investing has seen a sharp rise in popularity. Investors are increasingly interested in financial products that integrate sustainability into investment strategies. While prior studies have assessed the financial performance of ESG ETFs, fewer have examined the structural factors that may drive this performance. This thesis examines the financial performance of European ESG ETFs and explores the role of sector allocation in explaining their returns over an 11-year period from January 2014 to December 2024. An equally weighted portfolio of 28 passively managed ESG ETFs was constructed and evaluated against the MSCI ACWI benchmark. Monthly data was used to analyze raw and risk-adjusted performance. The study employed descriptive statistics, performance measures, and regression analyses based on CAPM, Fama-French, and Carhart models. Sector allocation and return correlations were analyzed to investigate alignment with the benchmark. The study found that the portfolio underperformed the benchmark modestly on both a raw and risk-adjusted basis, albeit with a lower volatility. However, this underperformance was not associated with any statistically significant alpha across the factor model specifications. Market exposure emerged as the primary driver of portfolio return variation. The portfolio displayed a clear benchmark alignment in terms of sector allocations and return correlation, which suggests no sector allocation bias relative to the benchmark. These results contribute to the ongoing debate on sustainable investing by providing long-term empirical evidence on the financial performance and structural characteristics of European ESG ETFs. They imply that a sustainable agenda can be pursued without materially sacrificing financial return. However, the findings also indicate that the distinctiveness of sustainable investing may be less definitive in practice than the ESG label implies.