The impact of ESG factors on Taiwan ETFs’ performance

Abstract

This study investigates the impact of ESG (Environmental, Social, and Governance) factors on the financial performance of Taiwan’s index exchange-traded funds (ETFs). As ESG disclosure and assessment methodologies have become more comprehensive, and regulatory requirements have expanded, Taiwan’s central role in global supply chains makes its ESG data particularly valuable for research and investment analysis. The study employs difference analysis, linear, and nonlinear regression models, analyzing monthly data from 2016 to 2023 and calculating the ESG scores adjusted for the weighted stock holdings of each fund. It explores the effect of ESG scores on fund flow, excess returns, CAPM alpha, and Sharpe ratio. The main empirical findings are as follows. First, ESG-themed funds attract significantly more capital flow than non-ESG funds, indicating market recognition of sustainable investment. However, no significant impact was found between ESG scores and fund flow. Second, although ESG funds attract more capital, they exhibit significantly lower excess returns and risk-adjusted returns. Environmental and social scores show a negative impact on excess returns and CAPM alpha in linear regression, suggesting that transition costs and investment restrictions in ESG-focused ETFs can constrain short-term performance and reduce diversification. Third, ESG and governance scores show nonlinear effects: while moderate improvements enhance excess returns, excessively high scores diminish these benefits. Lastly, when market attention is low, excess returns significantly improve, indicating that less attention to ESG-related topics reduces overpricing of ETFs.