Is ethical Investing less profitable? A comparative analysis of ESG and traditional mutual funds

Abstract

This thesis aims to investigate the uncertainty surrounding ESG mutual funds and their profitability compared to traditional mutual funds. By reviewing the current literature and through the use of a sample of large-cap equity mutual funds, the study analyses four key performance metrics: Standard Deviation, Beta, Sharpe Ratio, and Alpha to observe how the two types of funds differ from each other. After conducting a t-test and regression analysis, the findings reveal no significant difference in volatility between ESG and traditional funds, while also exhibiting significantly lower Sharpe Ratios and Alphas in ESG funds, suggesting poorer risk-adjusted returns and underperformance relative to traditional funds. The results of the research suggest that while ESG funds align with ethical and sustainability goals, they may come at the cost of lower financial performance while highlighting the need for investors to balance ethical considerations with financial objectives and calling for greater transparency and standardisation in ESG reporting to mitigate concerns about greenwashing.