The relationship between sustainability and financial performance : An empirical study of Swedish equity funds

Abstract: The general relationship between sustainability and financial performance has been well examined, and there doesn't seem to be any general significant tradeoff between the two. However, the results are mixed and the many ways of defining both sustainability and financial performance has provided room for different interpretations and methodologies. This study aims to use a relatively new measure of sustainability, Morningstar Sustainability Rating (MSR), and to see if there is a relationship with the risk-adjusted return of actively traded equity funds in Sweden. To calculate risk-adjusted return the Fama & French three factor model was used. After the two variables were established, a descriptive statistics analysis and a regression analysis was conducted, with two portfolios of different sustainability scores. The results were quite the opposite of that suggested by the general literature and our hypothesis that there would indeed be a positive relationship between the variables. However, we list a couple of potential reasons for this. The risk-free rate is lower today than at the time of many other studies. This could affect the outcome of the analysis. The sustainability measures can also differ quite significantly, and value aspects differently. A relatively new measure, with an “updated” view of sustainability, could therefore yield a different result than slightly older ones.