Sustainable yet similar: Challenging the performance and risk assumptions of sustainable market indices

Sustainable market indices are pivotal in the sustainable finance industry. This study examines if such indices exhibit a lower ESG risk relative to their benchmarks. The reduction of ESG risk, quantified as the ESG beta based on multi-factor models, is a key motivator for investing in sustainable financial products. Analyzing over 300 index pairs, our findings reveal no significant ESG risk mitigation in sustainable indices compared to their benchmarks. Thus, these indices may not offer additional ESG risk protection to investors. Moreover, our results support previous studies suggesting a limited impact of broad sustainable financial products on the real economy. • Sustainable market indices do not exhibit a lower ESG risk. • ESG risk is measured via factor models, eliminating the need for indices’ ESG score. • Our results imply a limited impact of such indices on the real economy.