Investing to Curb Climate Change - The Performance and Risk of Green Mutual Funds

Sammanfattning: Environmental concerns have come to increased investors’ attention and have raised the number of investment opportunities in green mutual funds. We advance an emerging debate on the link between financial and environmental performance by measuring the effects of green in a regional, sectoral and fossil fuel setting. We hypothesize that green funds are able to compete with conventional funds and that an increasingly favorable regulatory environment and a growing awareness in the society have led to performance improvements over time. Analyzing an equally weighted sample of 202 green and non-green funds for the period from 2002-2015, we find that in fact environmental funds do not perform significantly different from their conventional peers and that performance has improved over time. If we focus on more recent years (2013-2015) and the US market, green funds were even able to outperform conventional funds. While limited diversification possibilities borne by screening for environmental stocks let us to expect higher idiosyncratic risk of green funds, we do not find significant differences in risk exposure either. Indeed, we find a positive trend of green funds becoming significantly less volatile in later years (2013 and 2014), likely due to an increased investment horizon as more and more firms are ‘going green'.