A LOOK AT ESG INVESTING: EXPLORING COMMODITY PRICE EXPOSURES AMONG ESG AND TRADITIONAL MUTUAL FUNDS

Abstract

Common intuition suggests that environmental, social, and governance (ESG) managed funds are less exposed to commodity prices than traditional managed funds. This paper investigates the exposures to various commodities experienced by ESG and traditional mutual funds. It also seeks to identify whether, and to what extent, ESG funds are less exposed to commodity price risk than the overall market, given that they have specific environmental benchmarks they are required to meet. Through regression analysis, I compare the commodity price exposures of both the market and 70 different ESG mutual funds during the period April 2012 to December 2021. By controlling for the risk experienced by the overall market, I also investigate whether ESG fund exposure can merely be attributable to systematic risk. My findings suggest that ESG funds are not less exposed to commodities than the overall market–or traditional mutual funds, as such. The exposure to commodities experienced by ESG funds also cannot be simply attributed to systematic risk, and significant evidence even suggests that ESG commodity exposure is greater than that of the overall market in some instances. This paper speculates that this pattern arises because ESG mutual funds are designed to be sector-neutral, and their managers use positive screening as opposed to negative screening portfolio allocation strategies. Therefore, ESG investing does not and cannot exclude commodities as an asset class entirely and maintains exposure to commodity price risk