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The risk-reducing effect of ESG investment: Evidence from mutual funds

Author

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  • Li, Ruochen
  • Xue, Shuyu
  • Xuan, Quansheng
  • Cui, Xue

Abstract

This study explores the role of environmental, social, and governance (ESG) investment in mitigating fund risk and enhancing portfolio resilience, using Chinese mutual fund data from 2009 to 2022. We find that ESG investment in funds significantly decreases fund risk. The risk-reduction benefits are more pronounced for funds that are signatories to the Principles for Responsible Investment (PRI). Moreover, ESG-integrated funds exhibit lower risk and greater resilience during periods of adverse markets and heightened ESG-related attention. We further show that ESG investment is associated with lower tail risk, lower ambiguity, and higher net returns. These findings highlight the significance of ESG investing as a strategic tool for strengthening portfolio resilience and promoting financial stability.

Suggested Citation

  • Li, Ruochen & Xue, Shuyu & Xuan, Quansheng & Cui, Xue, 2026. "The risk-reducing effect of ESG investment: Evidence from mutual funds," Finance Research Letters, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:finlet:v:92:y:2026:i:c:s1544612326001029
    DOI: 10.1016/j.frl.2026.109571
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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