Do Socially Conscious ETFs Match Their Active Counterparts?

Ryan Cultice,Steven Dolvin

doi:10.5539/ibr.v13n4p100

Abstract

Over the past decade, Socially Responsible Investing (SRI) has grown at a rapid pace and, by some estimates, now represents a quarter of the $48 trillion in assets under professional management in the United States. At the same time, investors have broadly shifted from active to passive investing strategies. While there is significant research in each of these respective areas, we believe that we are the first to examine whether a socially conscious investor can employ a passive approach or if the constrained nature of SRI necessitates active management. As such, we examine the performance of socially conscious ETFs versus a matched sample of actively managed SRI mutual funds. We find the performance, as a whole, to be insignificantly different between the two groups, suggesting that the benefits of active management in this construct effectively offset the cost advantage of passive ETFs.

Highlights

Background and Literature Review2.1 Corporate Social ResponsibilityThe modern concept of Corporate Social Responsibility (CSR) has evolved extensively since the countervailing framework developed by Milton Friedman. Friedman (1970) argued that only people themselves can have responsibilities, whereas corporations act as artificial people and cannot have responsibilities
Our findings suggest that socially responsible investing (SRI) investors could follow either an active or passive approach and expect to earn similar risk-adjusted returns, with the apparent cost advantage of the exchange traded funds (ETFs) offsetting the active benefit within the SRI investment structure
If we find that passively managed ESG ETFs perform just as well as their active counterparts, we may conclude that SRI investors can choose passive ESG-focused ETFs to implement their investment philosophy without losing any perceived benefits of active management

Summary

Introduction

Background and Literature Review2.1 Corporate Social ResponsibilityThe modern concept of Corporate Social Responsibility (CSR) has evolved extensively since the countervailing framework developed by Milton Friedman. Friedman (1970) argued that only people themselves can have responsibilities, whereas corporations act as artificial people and cannot have responsibilities. CSR mainly revolved around corporate resources being used to pursue social ends, corporate philanthropy, and volunteerism, but as CSR gained traction its definition has been modified over the decades to include the concept of “the triple bottom line,” which is the goal of creating social, environmental, and financial benefits (Fulton, Kahn & Sharples, 2013), As the notion of CSR became more popular, Freeman and McVea (2000) advanced the idea that the owners of a corporation expanded to more than those with just a financial stake in the company. Freeman and McVea argue that to better ensure long-term sustainability, managers of a corporation must consider actions in terms of many different groups, such as the government, the community and employees. Following these principles, shareholders began demanding additional transparency regarding corporate performance that goes beyond traditional financial measures

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