Does ESG Investing Pay off? Comparing the Performance of ESG and Traditional ETFs Across European and US Markets

Abstract

Investors have long recognized the importance of firms in promoting sustainability, leading to the rise of socially responsible investment (SRI). Specifically, there is a growing preference for exchange-traded funds (ETFs) that prioritize environmental, social, and governance (ESG) principles. However, the performance of ESG ETFs has not been extensively studied, and existing findings remain inconclusive. This research addresses this gap by comparing ESG ETFs with traditional ETFs in Europe and the United States, analyzing the period 2014–2024, along with subperiods of pre-crisis (2014–2019) and crisis (2020–2024). The results show that ESG ETFs can offer diversification benefits, hedging capabilities, and safe-haven properties. However, performance outcomes vary across regions, investment strategies, and market conditions. In Europe, ESG ETFs improve risk-adjusted performance in utility-maximizing strategies. In the United States, ESG ETFs also enhance returns adjusted for risk in utility-maximizing portfolios during periods of market stress, though this advantage is less evident in more stable market conditions.