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The impact of ESG investment on fund performance: Evidence from mutual fund style drift

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  • Lin, Jiayu
  • Pan, Dongliang
  • Sha, Yezhou

Abstract

This study analyzes the impact of ESG investment on fund performance using a sample of China's open-end mutual funds from January 2006 to December 2020. ESG investment style scores were constructed based on portfolio weights and MSCI ESG investment styles. The results show a significant positive correlation between overall ESG investment styles (including the environmental, social, and governance sub-dimensions) and fund performance. After adjusting for four-factor risk, the High-Low strategy (Long-short) yielded monthly excess returns ranging from 0.371% to 0.465%. After considering different degrees of style drift, the funds with lower style drift experienced a stronger positive impact from ESG investment styles, with the High-Low strategy contributing up to 0.615% in monthly excess returns. These findings offer practical strategies for fund managers to optimize portfolio allocation and provide valuable guidance for investors selecting ESG-style funds. This study provides theoretical and empirical support for sustainable finance development in emerging markets.

Suggested Citation

  • Lin, Jiayu & Pan, Dongliang & Sha, Yezhou, 2025. "The impact of ESG investment on fund performance: Evidence from mutual fund style drift," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:pacfin:v:91:y:2025:i:c:s0927538x25000447
    DOI: 10.1016/j.pacfin.2025.102707
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    More about this item

    Keywords

    ESG investment; Style drift; Mutual fund; Portfolio optimization;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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