The Sustainable Era - The Excess Return on Swedish Sustainable Global Equity Funds

Abstract: This thesis explores the relationship between the performance of Swedish global equity funds and the level of sustainability, as measured by the Morningstar Globe Rating, using a Fama-French six-factor model, globe rating categories, and time effects. Treating the Morningstar Globe Rating as a time-invariant variable, a sample of 80 Swedish global equity funds are divided into two sustainability groups, ‘Low’ and ‘High’, grouping funds with 1-3 globes into a reference group. The fund performance, in US Dollars, is observed between 2018 to 2022. Firstly, the findings indicate that funds with a high sustainability rating have an insignificantly greater performance, on average, in terms of excess return. Secondly, funds with a high sustainability rating do not exhibit a lower level of risk, as measured by the variance of the excess return. Lastly, the thesis shows that Fama-French factors, specifically those from the Fama-French five-factor model, along with time effects, play a significant role in explaining the observed excess return in Swedish global equity funds. Overall, investors do not experience a negative impact on excess returns or variance by selecting more sustainable Swedish global equity funds, as measured by the Morningstar Globe Rating. These results differ from what would be expected from traditional economic theory, where the reduction of diversification and lost opportunities at high returns predict lower excess returns or higher risk. Rather, these results are more in agreement with the predictions of the Porter hypothesis, where good environmental regulation is predicted to stimulate innovation, efficiency and competitiveness, generating profitability.