ESG Performance in Exchange Traded Funds (ETFs) and Fixed Income in the Context of Home Bias

Abstract: This paper explores home bias and the performance of exchange traded funds (ETFs) and bonds under the context of Environmental, Social and Governance (ESG). It analyzes investment strategies led by non-financial variables such as sustainable and responsible investment and how it affects the expected returns and risk and if the home bias phenomenon is weaker when following the said strategy. The main results reveal that home bias persists in the ESG bond market, which can be explained by investors’ preference to use bonds as a hedging tool. The initial result of ETFs is similar: Regression on the asset level does not explain home bias, however, an in-depth analysis of the ETF assets using a bilateral country regression reveals that Country ESG Score ratios between two countries were significant and negatively correlated to the home bias. Following the relevance of the results on home bias, in a performance analysis for the period between May 2018 to May 2020, ESG ETFs performed better than non-ESG ETFs. Further analysis within ESG ETFs revealed that the list of ETFs with full domestic orientation and foreign bias performed worse than the list of ETFs with some degree of home bias. This suggests inconsistent investment decisions or the lack of explanatory power of ESG scores and ratings. As there has yet to be studies on the effects of ESG on home bias, this paper brings in a new agenda that needs the attention of academia and the private sector.