Value of sustainability in mutual fund investing: Analysis of excess returns in Europe

Abstract

This thesis examines the relationship between sustainability and mutual fund performance in the European equity mutual fund market. By focusing on 1,354 European funds from 2018 to 2023, the study evaluates the impact of ESG factors such as Morningstar Globe Ratings, SFDR classifications, and exclusionary strategies on fund returns. Additionally, we examine the drivers of empirical findings by analysing fund flows as a proxy for changing investor sentiment regarding sustainability.

Our findings indicate historical outperformance for funds with high Globe Ratings. However, this trend diminished post-2020, with performance influenced by market shocks and heightened fund inflows during periods of overperformance. Other ESG metrics, including SFDR classifications and exclusion strategies, showed less robust and inconsistent results, suggesting limited measurable impact on fund performance.

This study contributes to the existing literature by providing empirical evidence from European markets, offering insights into the drivers of ESG fund performance, and addressing gaps in data by incorporating an extended time period beyond the Covid-19 disruption. We challenge previous findings regarding the overperformance of sustainable funds and suggest alternative explanations for historical phenomena. These findings have significant implications for understanding the evolving role of sustainability in investment strategies.