The Green and Brown Performances of Mutual Fund Portfolios
42 Pages Posted: 1 Mar 2021 Last revised: 20 Oct 2022
Date Written: December 1, 2020
The past decade has seen an increasing interest in socially responsible investing (SRI) in the mutual fund industry. Central to this development is whether SRI funds underperform conventional funds. Using a novel approach, we decompose mutual fund portfolios into socially responsible (green) and non-socially responsible (brown) components. We find that, in comparison to the non-socially responsible component, the socially responsible portion exhibits a lower raw return, lower risk-adjusted return, lower Sharpe ratio, and similar degree of performance reversal. The magnitude of this underperformance is, however, relatively small. The results align with SRI having a limited negative impact on fund performance while potentially offering some diversification benefits.
Keywords: Mutual fund performance; Socially responsible investing (SRI); Non-socially responsible investing; Sustainable finance; Environment, Social, and Governance (ESG); Corporate social responsibility (CSR)
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation