This research examines whether environmental, social, and governance (ESG) integration comes at a cost financially through an analysis of the performance of global ESG and traditional funds.
Using a global dataset of funds (2018–2024), fixed-effects regressions, and risk-adjusted measures such as the Sharpe ratio, Jensen's alpha, and Drawdown, this paper examines performance differences.
Returns from ESG funds are similar to those of regular funds after risk adjustment. More specifically, ESG funds perform better in terms of risk management, with lower volatility (12.15 vs. 13.02%) and maximum drawdowns (−18.4% vs. −21.3%). Such an advantage is especially noticeable in equity funds, which demonstrate not only better performance but also lower volatility. Besides, ESG funds also proved more robust amid COVID-19-related risks, recording losses 1 point lower.
Integration of ESG provides a “haven” in times of market stress without affecting future gains. The results help investors manage risks and help policymakers justify sustainability finance models.
This study covers both the coronavirus outbreak and the 2022 energy crisis and offers crucial empirical evidence on the downside protection provided by ESG.
