The Green and Brown Performances of Mutual Fund Portfolios

Abstract

Interest in socially responsible investing (SRI) has skyrocketed within the mutual fund industry. Central to this development is whether SRI funds underperform conventional funds. Using a novel approach, we decompose mutual fund portfolios into socially responsible (green) and non-socially responsible (brown) components. We find that, in comparison to the non-socially responsible component, the socially responsible portion exhibits a lower raw return, lower risk-adjusted return, lower Sharpe ratio, and similar degree of performance reversal. The magnitudes of these underperformances are, however, small, and align with SRI having a limited negative impact on fund performance while potentially offering some diversification benefits.