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Smart beta ESG disclosure

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According to Jaakko Kooroshy (Head of SI Data & Methodologies, FTSE Russell): in 2017 over 40 of asset owners using or evaluating smart beta globally said they were looking to apply ESG considerations to a smart beta strategy. Now (2020), nearly 60 of asset owners using or evaluating smart beta are using or evaluating the two approaches together

Abstract

This research aims to examine several approaches, most commonly used by portfolio managers, to construct smart beta indices integrating environmental, social, and governance (ESG) factors and evaluate their performance in the Canadian context for the 2014–2109 period. We show that fundamental indexation works in Canada and that taking ESG factors into account does not harm smart beta portfolios performances compared to the capitalization-weighted portfolio. Our results are robust to several performance measures, to market conditions (bull vs. bear), and to different interest rate regimes.

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Notes

  1. “Smart” and “alternative” are used in this study interchangeably.

  2. See Leslie P. Norton, April 11, 2021, Barron’s, “BlackRock has launched two behemoth sustainable ETFs. What to know”. Available at: https://www.barrons.com/articles/blackrock-has-launched-two-behemoth-sustainable-etfs-what-to-know-51618167553.

  3. See Huber and Comstock (2017) for an interesting discussion about ESG reports and ratings.

  4. For example, López, Garcia, and Rodriguez (2007), Artiach et al. (2010), and Papoutsi and Sodhi (2020) also consider ESG disclosure scores to proxy for ESG performance.

  5. We also compared our results to the S&P/TSX Index. These results remain available upon request.

  6. The alpha information ratio is the value added divided by the replication error relative to the market. \({IR}_{alpha}=Alpha/{\sigma }_{(Ri-Rm)}\).

  7. The sector data are extracted from the WRDS COMPUSTAT database. We consider the 11 industry groups as developed by GICS, 'Global Industry Classification Sectors.'

  8. We thank our anonymous reviewer for suggesting this robustness test.

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Acknowledgement

We gratefully acknowledge the financial support of the CDPQ Research Chair in Portfolio Management of the School of Management (UQAM). We are responsible for any remaining errors.

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Authors and Affiliations

  1. School of Management, CDPQ Research Chair in Portfolio Management, Department of Finance, Université du Québec à Montréal, 315 Rue Sainte-Catherine Est, Montréal, Québec, H2X 3X2, Canada

    Besbes Yasmine

  2. School of Management, CDPQ Research Chair in Portfolio Management, Department of Finance, Université du Québec à Montréal, 315 Rue Sainte-Catherine Est, Montréal, Québec, H2X 3X2, Canada

    Maher Kooli

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  1. Besbes Yasmine
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Correspondence to Maher Kooli.

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Yasmine, B., Kooli, M. Smart beta ESG disclosure. J Asset Manag 23, 567–580 (2022). https://doi.org/10.1057/s41260-022-00257-1

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