Performance and investment styles of green mutual funds: a cross-country analysis

The global rise of sustainable investments has sparked debate on integrating financial and environmental criteria in portfolio selection, yet research on the performance difference between green and conventional funds, particularly during the COVID-19 pandemic, remains limited and inconclusive. To address this gap, the current study compares the performance of 108 green funds with 2399 matching conventional funds across Europe, the United States, and Japan. The study uses a six-factor-based methodology and concludes that, on average, green funds underperform their conventional counterparts by 1.30% p.a. during the 2000–2022 period. The study also finds that green funds, on average, are more sensitive toward the Dow Jones Sustainability Index (DJSI) than conventional funds by 0.084, highlighting their superior ability to incorporate environmental risks. Further evidence suggests that, on average, conventional funds experience higher tail losses [Value-at-Risk (VaR) at 90% and 95% levels] during the COVID-19 pandemic, with differences of 0.4% (90%-VaR) and 0.9% (95%-VaR) compared to green funds. This suggests that the asymmetric return pattern in green funds is due to their reduced exposure to environmental risks, and they offer protection to investors during catastrophic events like the COVID-19 pandemic. Overall, the study suggests that investing in green funds enables investors and fund managers to manage financial risks linked to environmental challenges while aiding policymakers in advancing sustainable investments to achieve the UN SDGs and build a resilient economy. To the best of the author’s knowledge, this is the first study that comprehensively examines the difference in the performance of green and matching conventional funds in the three largest markets for sustainable investments by using daily return data and six-factor methodology, especially during the COVID-19 pandemic (tail risk behavior).