Does Sustainable Investing Reduce Portfolio Risk? A Multilevel Analysis

Abstract

This study complements and extends prior research on the risk mitigation role of sustainable investing. We use a continuous measure of funds’ sustainability traits, rather than a categorical approach, and assess impact on risk directly rather than by looking at fund performance in up versus down markets. We find that sustainable investing plays a significant role in mitigating total, systematic, and idiosyncratic risk of equity funds, even after controlling for other fund characteristics. Further evidence indicates that the explanation for the risk reduction role of sustainable funds largely runs through traits of the firms held in the funds.

Keywords: Sustainable Investing, Portfolio Risk, Mutual Funds, Corporate Social Responsibility

JEL Classification: G11, G30, M14