ESG Balancing the Books and the Planet: A Quantitative Analysis of Risk-Adjusted Returns in ESG and Traditional Funds

Sammanfattning: The demand for sustainable investment has increased in the last decade. “Environmental, Social and Governance” (ESG) are characteristics within sustainable investment and are commonly considered in private investing. The purpose of this study is to analyze the risk-adjusted return between an ESG-fund portfolio and a traditional fund portfolio, during a five year time period from 2018-2023. The analysis consists of 43 ESG funds and 42 traditional funds, where the funds have been selected according to their specific rating they received from the Morningstar Sustainability Rating and geographical location. To investigate the purpose, methods such as the Fama-French three factor regression and OLS regression have been used. In particular, we address the potential concerns of investors who invest their money in mutual funds and the research questions were as follows: 1) Does a difference exist between the risk-adjusted returns of an ESG and traditional fund portfolio? 2) How substantial is that difference and in favor of what portfolio? The findings show that there exists a difference in risk-adjusted returns between an ESG portfolio and a traditional portfolio. When investing in an ESG portfolio, the investor assumes a heightened degree of overall risk, in contrast to investing in a traditional portfolio. This due to that ESG portfolio return being on average less than the traditional return. These results could be helpful for investors when looking to diversify their portfolios while still making investments in accordance with their values.