The heterogeneity of the diversification effect of sustainable development goals related exchange-traded funds

Abstract

With the launch of the United Nations 2030 Agenda for 17 Sustainable Development Goals (SDGs), investors are encouraged to contribute to solving some of the world's most pressing problems through their business activities. This paper examines the diversification benefits of SDGs exchange-traded funds (ETFs) from the perspective of tactical and strategic investors. Specifically, the risk-adjusted returns of equity market portfolios with and without SDGs ETFs are compared. The incremental impact is assessed using variable weightings, while the persistence is investigated over time. The results show that the effects of diversification vary greatly across SDGs. ETFs linked to economic growth and innovation improve reward-risk ratios significantly, particularly for strategic investors. ETFs associated with renewable energy, on the other hand, deteriorate portfolio efficiency. The ETF based on good health has the potential to reduce portfolio downside risk. The findings provide useful implications for investors seeking to add value through socially responsible investing.

KEYWORDS:

• Sustainable development goals
• socially responsible investment
• environmental, social and governance
• United Nations 2030 Agenda
• exchange-traded funds
• diversification benefits

JEL CLASSIFICATION:

• G10
• G11
• G14

Acknowledgments

The author thanks the editor and an anonymous referee for their detailed review and valuable comments that improved the paper. All views are those of the author and do not necessarily reflect those of the institution to which the author is affiliated.

Data availability statement

The data that support the findings of this study are openly available from https://www.investing.com.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 A recent literature review of SRI can be found at Widyawati (2020).

2 The percentage is based on the Pareto, or 80/20 principle, which states that 80% of the outputs or rewards are generated from only 20% of the causing inputs or efforts.

3 The market risk capital requirement for banks is based on a 10-day VaR with a 99% confidence level. Regulatory VaR backtesting is the method of comparing the daily one-day VaR to the buy-and-hold income at a 99% confidence interval. For more information, see BCBS (1996).

4 According to Miralles-Quirós, Miralles-Quirós, and Nogueira (2020), these are the most investable goals in terms of ‘planet’ and ‘prosperity’, which require immediate action from investors and corporations.