Screening techniques, sustainability and risk adjusted returns. : - A quantitative study on the Swedish equity funds market
Sammanfattning: Previous studies have primarily compared the performance of sustainable equity funds and non-sustainable equity funds. A meta-analysis over 85 different studies in the field concludes that there is no statistically significant difference in risk-adjusted returns when comparing sustainable funds and non-sustainable funds. This study is thus an extension on previous studies where the authors have chosen to test the two most common sustainability screening techniques to test if there is a difference within the sustainability field of equity funds. In this study, we compare the performance of the two primary screening techniques used with regards to sustainability within the equity fund industry: the exclusionary Negative Screening and the Mixed Method Screening (Negative screen followed by an additional positive screen). The tests were conducted on both Swedish equity funds as well as Global equity funds, where both groups had to be eligible to be marketed in Sweden according to Swedish law. What the study found when comparing the two types of screening techniques was that over a five-year period, equity funds using a Mixed Method screen had a significantly lower risk adjusted return compared to the Negative Screen group. The study also showed differences between Global equity funds and Swedish equity funds, where Global equity funds were the category that did not produce significantly different risk adjusted returns when screened for sustainability criteria’s. The findings put forward in this study indicate that the Modern Portfolio Theory and its joining theory of the Efficient Frontier are applicable to the sustainability-screening context. The Good Management theory is also tested with regards to a company’s CSR work and risk-adjusted returns. The Good Management theory does however not find any support in our results. CAPM is also tested in the context of sustainability screening, and the results found regarding the CAPM’s ability to explain different returns are not as clear-cut as the rest of the results. Our overall conclusion from this study is that Negative Screening produces better financial results compared to Mixed Method screening with regards to sustainability, but more importantly we have come to realize that the transparency within the mutual funds market must be enhanced with regards to sustainability in order for future studies to deliver a more in-depth analysis of the causes that drives the different returns.
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