Market Risk in Sustainable and Traditional Exchange-Traded Funds during Global Uncertainty

Abstract

Amid global market turbulence triggered by the COVID-19 pandemic and subsequent geopolitical disruptions, investor interest in environmental, social, and governance (ESG) criteria has grown significantly. This study investigates the comparative market risk and performance of traditional and ESG-focused exchange-traded funds (ETFs) in U.S. and European markets from January 2020 to April 2025. The aim was to identify which ETF type delivers superior performance in terms of returns and risk mitigation during periods of heightened volatility. Using daily return data from eight ETFs (four U.S., four European; both ESG and traditional), we applied Value at Risk (VaR), Conditional Value at Risk (CVaR), and Sharpe ratio analysis. The results revealed notable regional differences: traditional U.S. ETFs achieved the highest returns and risk-adjusted performance, while European ESG ETFs demonstrated the lowest downside risk. ESG ETFs in the U.S. performed comparably to traditional funds, suggesting that ESG integration does not necessarily compromise financial outcomes. These findings highlight that ESG-related risk and return profiles vary by region. For investors and portfolio managers, this suggests that ESG allocation decisions should consider regional market dynamics to strike a balance between sustainability goals and financial performance.