Abstract
This paper assesses the level of adherence of the U.S. equity index funds to best practices from an Environmental, Social and Governance (ESG) perspective. The sample includes 27 ESG index funds and the study period spans from 1 August 2017 to 31 July 2022. A simple research approach is employed. First, the correlations of index funds with the S&P 500 Index, as well as, with three alternative broad market ESG indexes, are computed. Corresponding betas are estimated too. Then, the portion of the S&P 500 stocks with severe or high Morningstar ESG risk scores held by each fund is calculated. The findings reveal an average correlation of ESG index funds with the S&P 500 Index of 0.90. Similar correlation figures with the other indexes are computed. Betas with all indexes are very high, approximating unity. Moreover, about 26% of the funds invest more than 5% of their assets in S&P 500 stocks with high or severe ESG risk. The findings combined indicate that, to a large extent, ESG index funds just track the S&P 500 Index, while marketing themselves as being ESG compliant. The latter can be indicative of some level of “greenwashing” on behalf of index funds.
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