Are sustainable funds sustainable in terms of return? : a study on the Swedish fund market

Abstract: Sustainable investments have become a highly popular choice amongst private investors over the last decades and the number of alternatives has increased on the Swedish market. Sustainable funds have become one of the more popular options for Swedish investors that looks for sustainable investment options. Sustainable funds should however not be able to compete with conventional funds, according to the modern portfolio theory. The theory state that sustainable funds should perform a lower return than conventional funds due to placement restrictions. Previous studies about sustainable funds are inconclusive on how sustainable funds have performed compared to conventional ones. This research aims to examine if there are any differences between sustainable and conventional funds in terms of risk-adjusted return on the Swedish market. Through a matched pair approach, 13 sustainable and 13 conventional funds were analyzed during a 6-year period between 2013 and 2018. The performance of the two fund categories were evaluated with Sharpe ratio, Treynor ratio and Jensen’s alpha to measure their risk-adjusted return. The performance of these funds was tested over time as well as during sub-periods of 2 years each. The results of this study indicate that the conventional funds performed a higher risk-adjusted return during the full sample period. The sustainable funds however performed a higher risk-adjusted return during the last sub-period between 2017 and 2018. However, there was no significant difference between sustainable and conventional funds during the full sample period or the sub-periods. Therefore, private investors can expect sustainable and conventional funds to yield the same risk-adjusted return over time.