IDEAS home Printed from https://ideas.repec.org/a/taf/jsustf/v13y2023i4p1534-1553.html
   My bibliography  Save this article

The cost of insuring against underperformance of ESG screened index funds

Author

Listed:
  • Peter Løchte Jørgensen
  • Mathias Danielsen Plovst

Abstract

In recent years, investors have shown significant interest in responsible investment products, including sustainable and ESG screened index funds. A natural concern for prospective investors in such funds is that a sustainable fund might underperform its classical unscreened counterpart. This paper argues that this underperformance risk can be analyzed by way of an option to exchange one asset for another, and we derive a simple formula that quantifies the fair annual insurance premium for covering this risk. Only a single parameter is needed to apply the formula. This parameter – a relative index volatility – is readily estimated from market data. Our empirical work utilizes data from BlackRock's ETF (iShares) universe to estimate the cost of insuring against underperformance risk of some common ESG screened funds. We find that the fair cost of underperformance insurance typically corresponds to sacrificing in advance between 0.5% and 3.0% of the annual return.

Suggested Citation

  • Peter Løchte Jørgensen & Mathias Danielsen Plovst, 2023. "The cost of insuring against underperformance of ESG screened index funds," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 13(4), pages 1534-1553, October.
    • Handle: RePEc:taf:jsustf:v:13:y:2023:i:4:p:1534-1553
    DOI: 10.1080/20430795.2022.2147778
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/20430795.2022.2147778
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/20430795.2022.2147778?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:jsustf:v:13:y:2023:i:4:p:1534-1553. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/TSFI20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.