Sustainable Funds’ Performance Evaluation

Xiao-Guang Yue,Wei Liu,Deimante Teresiene,Yan Han,Justina Merkyte

doi:10.3390/su12198034

Abstract

The purpose of this research is to consider if the growing popularity of sustainable investment does not create additional risks in investing. Different views on sustainable investments were analyzed to identify different approaches to the main risks. A quantitative analysis was carried out to investigate the possible benefits and advantages of sustainable investment. Without taking into account the social perks of investing in sustainable funds, this study evaluates the performance and economic returns of both sustainable and traditional funds. The research was carried out in two parts by comparing samples of 30 sustainable and 30 traditional funds. Firstly, such methods as annual returns, standard deviations, Sharpe ratios, skewness, and kurtosis were calculated and analyzed. The Capital Asset Pricing Model (CAPM), Fama–French three-factor model and Carhart four-factor model were used to value different market portfolios. The findings of this study suggest that sustainable funds are less risky than traditional funds. However, at the same time, we want to point to pay attention to the period of our analysis and to have in mind that an increasing demand of social responsible assets increases risks as well. However, no clear evidence was found to confirm that sustainable funds can generate higher returns compared to traditional piers or benchmark index. Moreover, after studying different methods the study reveals that the Fama–French three-factor model was the most suitable for explaining the traditional and sustainable funds’ results.

Highlights

Sustainable investment is a relatively new concept in capital markets as it received extensive attention only in the 21st century
After studying different methods our research reveals that the Fama–French three-factor model was the most suitable for explaining the traditional and sustainable funds’ results
Some cases show that sustainable investments do not always add value to green finance and sometime just create additional risks to institutions

Summary

Introduction

Sustainable investment is a relatively new concept in capital markets as it received extensive attention only in the 21st century. Bauer et al (2005) found no statistically significant difference between the returns of ESG mutual funds and those of all funds [3]. Many more recent studies have found no statistically significant difference between the returns of ESG investments and those of conventional investments. We add value to the scientific literature by determining that sustainable funds are less risky than traditional funds but at the same time we raise an issue that an increasing demand of socially responsible assets increases risk as well. The latter point is an especially new aspect in the field of scientific research. We presented our results and discussed on different issues

Literature Review

Data and Research Methodologies

Results and Discussion

Conclusions

Principles for Responsible Investment