Investments in ESG-Rated Mutual Funds: Is Good Better than Great?

Abstract

Socially responsible mandated mutual funds are a popular class of funds characterized by strategies that address sustainability, responsibility, and impact. The dramatic growth of socially responsible mandated mutual funds during the last decade, makes it important to understand how their social metrics (environmental, social, and governance; ESG) relates to their financial performance. This article compares the risk-adjusted returns of socially responsible mutual funds (SRMF) with funds rated by Morningstar^® Portfolio ESG Score^TM grouped into low, medium, and high ratings. We find that during the period of pre-recession boom, the funds with high-ESG ratings had a significantly higher risk-adjusted performance than did funds with a low-ESG or mid-ESG rating. This trend continued during the early parts of the Great Recession. During periods of economic recovery and growth, SRMF rated low on ESG performed significantly better than highly rated SRMFs. For medium rated SRMFs, other than prior to the Great Recession, fund performance was not consistently significantly different from highly rated SRMFs.

TOPICS: ESG investing, performance measurement, financial crises and financial market history