Sustainable investment strategies: Exploring mutual funds' exclusionary approaches and herding dynamics in ESG stock

Abstract

This thesis investigates two key aspects of investment behavior and performance within the realm of sustainable finance: market herding behavior among ESG (Environmental, Social, and Governance) stocks in the United States stock market and the performance of mutual funds employing exclusion methods. The first study examines market herding behavior, focusing on top-rated ESG firms, utilizing a comprehensive literature review and statistical analysis. The findings reveal no evidence of herding behavior among the top 100 highest-rated ESG stocks during the specified period, aligning with previous research in the field. This contributes to the understanding of investor behavior and market dynamics in sustainable investing. The second study compares the performance of mutual funds employing exclusion methods for "sin stocks" with those that do not employ such methods. Statistical analysis demonstrates distinct risk and return characteristics between the two types of funds, with exclusion funds exhibiting a narrower range of returns and higher average returns. These findings suggest that exclusion methods may contribute to a more focused and potentially less risky investment portfolio, supporting the broader trend of sustainable investing. Overall, this thesis provides valuable insights into investor behavior, market dynamics, and the performance implications of sustainable investing strategies, offering implications for investors, asset managers, and policymakers in the pursuit of financial and ethical goals in the investment landscape.