Incorporating ESG Aspects into the Investment Analysis of Mutual Funds: Empirical Evidence on the Impact of two Different SRI Approaches

Josephine Maxén & Philippa Hamilton

Student thesis: Master thesis


Purpose: The aim of this study, is to investigate whether fund managers improve or worsen the performance of their funds, by incorporating ESG aspects into their investment processes. In order to investigate this, the impact of two explicit sustainable responsible investing (SRI) approaches are investigated: norms-based screening and best-in-class ESG integration.
Data: The data includes 30 regular Scandinavian mutual funds, analysed from 2005 to 2016.
Method: To fulfil the purpose of this thesis, the historical returns of 30 regular funds are compared with the historical returns of SRI versions of these funds. This study is not analysing any existing SRI funds, but instead create synthetic SRI funds based on the holdings of the regular funds. Two types of SRI funds are created: norms-based screened funds, and ESG-tilted funds. The norms-based screened funds are created by excluding companies found in the regular funds’ holdings, that are reported on annual norms-based exclusion lists, used by three different Scandinavian pension funds. The synthetic ESG-tilted funds are created by changing the weights of the holdings in the regular funds, depending on the ESG ratings of the companies. The performance of the regular funds and the synthetic SRI funds, are evaluated using a one-factor market model and Carhart four- factor model. The norms-based screened funds are evaluated over two subperiods: one long (2005-2016) and one short (2014-2016), while the ESG tilted funds only are evaluated over the short period.
Results and Conclusions: Norms-based screening was significantly proven to have a negative impact on the financial performance of mutual funds, as measured over the long period. When only analysing the data of the short period, no significant difference in performance was identified between neither the norms-based screened funds and the regular funds, nor between the ESG-tilted funds and the regular funds.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2017
Number of pages130