Skip to main content
SpringerLink
Log in

Environmental Mutual Funds: Financial Performance and Managerial Abilities

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This article analyzes the financial performance and managerial abilities of a sample of US and European socially responsible (SR) mutual funds. The period analyzed commences from January 1994 and concludes in January 2013 and yields 18 US and 89 European green funds. The results obtained for green fund managers are compared with those achieved for conventional and other forms of SR mutual fund managers. We control for the mutual fund investment objective (distinguishing between domestic and global portfolios) and for the effect of crisis market periods. For US SR funds, partitioning the data into crisis and normal periods reveals that SR funds obtain statistically insignificant performance in crisis periods but underperform relative to the market in normal periods. Furthermore, the findings indicate that green funds do not perform worse than other forms of SR mutual funds. For European SR funds partitioning the data into crisis and normal periods reveals that SR funds obtain statistically insignificant performance irrespective of market conditions. Similar to the US findings, green Europe SR funds do not perform worse than other forms of SR mutual funds. Managerial abilities are not evident in the findings though unsuccessful timing of the market is revealed for both Europe and US global green funds. When analyzing managerial abilities in crisis and non-crisis market periods, US green fund managers achieve better results in crisis market periods and the opposite occurs for green fund managers in European market.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

Notes

  1. http://www.ussif.org/.

  2. Renneboog et al. (2008a) and Chegut et al. (2011) carry out a full review of the relevant literature.

  3. Derwall et al. (2005) analyze the financial performance of two portfolios; the first includes companies occupying high positions in environmental rankings, and the second contains low-ranked companies. Although it is an interesting analysis of the influence of environmental issues on financial performance, it does not analyze green funds.

  4. This figure is obtained by considering the different share classes as different mutual funds.

  5. For each market, the green funds have been classified according to the investment aim. We split each sample into two groups, funds with a domestic investment aim, and funds with a global investment aim. In the US market, there are six funds with a domestic investment aim and 12 funds with a global investment aim. In the European market, there are 20 funds with a domestic investment aim and 69 funds with a global investment aim.

  6. Although this is the procedure followed for most of the green funds, in some cases we had to relax the inception date restriction in order to find conventional peers.

  7. According to Kurtz (2008), “Religious belief was the first rationale for SRI, and remains an important force today, especially in the United States”.

  8. In the case of global equity funds, Morningstar identifies only five US religious mutual funds that invest in the global market. Besides, except for one of these funds whose inception date is 2001, the rest of the funds did not appear until 2008. This difference in the life cycle makes the results obtained for the religious “global” funds not comparable with those obtained for the green “global” funds.

  9. For European market, Morningstar does not identify any socially conscious mutual fund that establishes religious screens.

  10. Climent and Soriano (2011) conclude that multifactor models are superior in explaining mutual fund returns.

  11. Data available on Kenneth French website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  12. We have analyzed the peaks and troughs from the EuroStoxx 50 Index and the crisis market periods identified are very similar to those obtained from Standard and Poor’s 500 Index.

  13. Table 3 is focused on the alpha coefficient since it is the parameter that tells us about financial performance. The estimated Carhart factor coefficients are available to readers upon request.

  14. One possible explanation for this difference could be the different period analyzed. Varma and Nofsinger (2012) analyze the period 2000–2011, whereas we study the period 1994–2013.

Abbreviations

ECB:

European Central Bank

ESG:

Environmental, Social, and Governance

EU:

European Union

Eurosif:

The European Sustainable Investment Forum

GW:

Gregory and Whittaker (2007)

TM:

Treynor and Mazuy (1966)

TNAs:

Total net assets

SR:

Socially responsible

SRI:

Socially responsible investment

US:

United States

US SIF:

United States Social Investment Forum

References

  • Abdullah, F., Hassan, T., & Mohamad, S. (2007). Investigation of performance of Malaysian Islamic unit trust funds. Managerial Finance, 33(2), 142–153.

    Article  Google Scholar 

  • Ambec, S., & Lanoie, P. (2008). Does it pay to be green? A systematic overview. Academy of Management Perspectives, 22(4), 45–62.

    Article  Google Scholar 

  • Barnett, M., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27(11), 1101–1122.

    Article  Google Scholar 

  • Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(1), 57–82.

    Article  Google Scholar 

  • Chan, L., Chen, H., & Lakonishok, J. (2002). On mutual funds investment styles. Review of Financial Studies, 15(5), 1407–1437.

    Article  Google Scholar 

  • Chang, C., Nelson, W., & Witte, H. (2012). Do green mutual funds perform well? Management Research Review, 35(8), 693–708.

    Article  Google Scholar 

  • Chegut, A., Schenk, H., & Scholtens, B. (2011). Assessing SRI fund performance research: Best practices in empirical analysis. Sustainable Development, 19(2), 77–94.

    Article  Google Scholar 

  • Chen, Y. (2007). Timing ability in the focus market of hedge funds. Journal of Investment Management, 5(1), 3–57.

    Google Scholar 

  • Christensen, M. (2005). Danish mutual fund performance: Selectivity, market timing and persistence. Working Paper. Aarhus School of Business, Aarhus.

  • Climent, F., & Soriano, P. (2011). Green and good? The investment performance of US environmental mutual funds. Journal of Business Ethics, 103(2), 275–287.

    Article  Google Scholar 

  • Daniel, K., Grinblatt, M., Titman, S., & Wermers, R. (1997). Measuring mutual fund performance with characteristic based benchmarks. Journal of Finance, 52(3), 1035–1058.

    Article  Google Scholar 

  • Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 51–63.

    Article  Google Scholar 

  • Fama, E., & French, K. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.

    Article  Google Scholar 

  • Ferruz, L., Muñoz, F., & Vargas, M. (2012). Managerial abilities: Evidence from religious mutual fund managers. Journal of Business Ethics, 105(4), 503–517.

    Article  Google Scholar 

  • Glassman, D. A., & Riddick, L. A. (2006). Market timing by global fund managers. Journal of International Money and Finance, 25(7), 1029–1050.

    Article  Google Scholar 

  • Gregory, A., & Whittaker, J. (2007). Performance and performance persistence of ethical unit trusts in the UK. Journal of Business Finance and Accounting, 34(7–8), 1327–1344.

    Article  Google Scholar 

  • Heinkel, R., Kraus, A., & Zechner, J. (2001). The effect of green investment on corporate behavior. Journal of Finance and Quantitative Analysis, 36(4), 431–449.

    Article  Google Scholar 

  • Hoepner, A., Rammal, H., & Rezec, M. (2011). Islamic mutual funds’ financial performance and international investment style: Evidence from 20 countries. The European Journal of Finance, 17(9–10), 829–850.

    Article  Google Scholar 

  • Inoue, T., Masuda, A., & Oshige, H. (2013). The contagion of the Greek fiscal crisis and structural changes in the Euro sovereign bond markets. Public Policy Review, 9(1), 171–202.

    Google Scholar 

  • Jiang, G. J., Yao, T., & Yu, T. (2007). Do mutual funds time the market? Evidence from portfolio holdings. Journal of Financial Economics, 86(3), 724–758.

    Article  Google Scholar 

  • Kelly, B. (2010). Investing in green mutual funds: Determining the environmental screens applied in actively managed funds. Doctoral dissertation, Olivet Nazarene University, Bourbonnais, IL.

  • Knigge, A., Nowak, E., & Schmidt, D. (2004). On the performance of private equity investments: Does market timing matter? In European Financial Management Association (EFMA) 2004 Meeting. Basel, Switzerland.

  • Kreandert, N., Gray, R. H., Power, D. M., & Sinclair, C. D. (2005). Evaluating the performance of ethical and non-ethical funds: A matched pair analysis. Journal of Business Finance and Accounting, 32(7–8), 1465–1493.

    Article  Google Scholar 

  • Kurtz, L. (2008). Socially responsible investment and shareholder activism. In A. Crane, A. McWilliams, D. Matten, J. Moon, & D. Siegel (Eds.), The Oxford handbook of corporate social responsibility (pp. 249–280). Oxford: Oxford University Press.

    Google Scholar 

  • Lakonski, L. (2000). Determinants of environmental profit: An analysis of the firm-level relationship between environmental performance and economic performance. Doctoral dissertation, Helsinki University of Technology, Institute of Strategy and International Business, Helsinki.

  • Lakonski, L. (2006). Environmental and economic performance: The basic links. In S. Schategger & M. Wagner (Eds.), Managing the business case for sustainability (pp. 32–46). Sheffield: Greenleaf Publishing.

    Google Scholar 

  • Lee, D., Humphrey, J., Benson, K., & Ahn, J. (2010). Socially responsible investment fund performance: The impact of screening intensity. Accounting and Finance, 50(2), 351–370.

    Article  Google Scholar 

  • Lu, J. (2005). What is the wind behind this sail? Can fund managers successfully time their investment styles? Doctoral dissertation, Cranfield School of Management. The Centre for Financial Research, Bedford.

  • Ohno, S. (2013). European sovereign risk: The knock-on effects of default risk across the public and financial sectors. Public Policy Review, 9(1), 139–170.

    Google Scholar 

  • Renneboog, L., Ter Horst, J., & Zhang, C. (2008a). Socially responsible investments: Institutional aspects, performance, and investor behavior. Journal of Banking & Finance, 32(9), 1723–1742.

    Article  Google Scholar 

  • Renneboog, L., Ter Horst, J., & Zhang, C. (2008b). The price of ethics and stakeholder governance: The performance of socially responsible mutual funds. Journal of Corporate Finance, 14(3), 302–322.

    Article  Google Scholar 

  • Renneboog, L., Ter Horst, J., & Zhang, C. (2011). Is ethical money financially smart? Nonfinancial attributes and money flows of SR investment funds. Journal of Financial Intermediation, 20(4), 562–588.

    Article  Google Scholar 

  • Romacho, J. C., & Cortez, M. C. (2006). Timing and selectivity in Portuguese mutual fund performance. Research in International Business and Finance, 20(3), 348–368.

    Article  Google Scholar 

  • Rompotis, G. G. (2007). Can Greek mutual funds managers outguess the market persistently? Working paper. University of Athens, Athens.

  • Schröeder, M. (2004). The performance of socially responsible investments: Investment funds and indices. Swiss Society for Financial Market Research, 18(2), 122–142.

    Google Scholar 

  • Swinkels, L., & Tjong-a-Tjoe, L. (2007). Can mutual funds time investment styles? Journal of Asset Management, 8(2), 123–132.

    Article  Google Scholar 

  • Treynor, J., & Mazuy, K. (1966). Can mutual funds outguess the market? Harvard Business Review 44, 131–136.

    Google Scholar 

  • Varma, A., & Nofsinger, J. R. (2012). Socially responsible funds and market crises. In Midwest Finance Association 2013 Annual Meeting. Chicago, IL, USA.

  • Wermes, R. (2000). Mutual fund performance: An empirical decomposition into stock-picking talent, style, transaction costs, and expenses. Journal of Finance, 55(4), 1655–1703.

    Article  Google Scholar 

  • White, M. (1995). The performance of environmental mutual funds in the United States and Germany: Is there economic hope for green investors? In J. Post (Ed.), D. Collins & M. Starik (Vol. Eds.), Research in corporate social performance and policy (Suppl. 1, pp. 323–344). Greenwich, CT: JAI Press.

  • Woodward, G., & Brooks, R. D. (2006). The market timing ability of Australian superannuation funds: Nonlinearities and smooth transition models. Working paper. University of Colorado and Monash University.

  • Yu, H. Y. (2012). Where are the smart investors? New evidence of the smart money effect. Journal of Empirical Finance, 19(1), 51–64.

    Article  Google Scholar 

Download references

Acknowledgments

The authors would like to express our acknowledgements to Aragon’ Government by the funding received as Public and Official Research Group (GIECOFIN).

Author information

Authors and Affiliations

  1. Centro Universitario de la Defensa de Zaragoza, Academia General Militar, Ctra. de Huesca s/n, 50090, Saragossa, Spain

    Fernando Muñoz

  2. Departamento de Contabilidad y Finanzas, Universidad de Zaragoza, C/Gran Vía 2, 50005, Saragossa, Spain

    Maria Vargas & Isabel Marco

Authors
  1. Fernando Muñoz
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Maria Vargas
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Isabel Marco
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Fernando Muñoz.

Appendices

Appendix 1: Strategies Followed by Green Mutual Funds

Green funds pursue a broad variety of strategies in order to include environmental issues in their investment decision process. We can find several examples of these strategies, from the portfolio information provided in their prospectus.

Thus, we find green funds that consider positive screens, as for example the “Alger Green Fund”, which states the following regarding its principal investment strategy: “Under normal circumstances, the Fund invests at least 80 % of its net assets, plus any borrowings for investment purposes, in equity securities of companies of any size that, in the opinion of Fred Alger Management, Inc., conduct their business in an environmentally sustainable manner, while demonstrating promising growth potential. Companies that conduct their business in an environmentally sustainable manner are companies that have developed or are developing or marketing products or services that address human needs without undermining nature’s ability to support our economy into the future, have a positive or neutral impact on the environment on a relative basis, or recognize environmental sustainability as a challenge and opportunity as demonstrated through their business strategies, practices or investments”.

Another way to tackle the environmental dimension in the investment process is to select stocks from industrial sectors considered to be ecological or environmentally friendly. This is the case for the green fund “Firsthand Alternative Energy”. Its data sheet document states the following with regard to its investment strategy: “The Fund invests in alternative energy and energy technology companies, both U.S. and international. Alternative energy includes solar, hydrogen, wind, geothermal, hydroelectric, tidal, biofuel, and biomass. Because there are no market capitalization restrictions on the Fund’s investments, the Fund may purchase stocks of any capitalization.”

Another example is the “New Alternatives Fund” which states in its prospectus, “Under normal market conditions, at least 25 % of the Fund’s total assets will be invested in equity securities of companies in the alternative energy industry. “Alternative Energy” means the production and conservation of energy in a manner that reduces pollution and harm to the environment, particularly when compared to conventional coal, oil or nuclear energy”.

Other funds also impose negative or exclusionary environmental screens; i.e., they avoid companies from certain sectors considered to be harmful to the environment. One example is the “Green Century Equity fund” that states the following in its prospectus: “…It excludes investments in companies with the worst environmental and social records on waste disposal, toxic emissions, environmental fines/penalties, recycling, waste and emissions reduction…”.

Appendix 2: US Green Mutual Funds

List of green mutual funds from US market with a domestic investment aim analyzed: Alger Green Fund, Brown Advisory Winslow Sustainability, DFA US Sustainability Core, Great-West Ariel Mid Cap Value Init, Great-West Ariel Small Cap Value and the Green Century Equity.

List of green mutual funds from US market with a global investment aim analyzed: Allianz Global Water, Calvert Global Alternative Energy, Calvert Global Water, Firsthand Alternative Energy, Guinness Atkinson Alternative Energy, Meeder Utilities and Infrastructure, DFA Intl Sustainability Core, Gabelli SRI Green, New Alternatives, Pax World Global Environmental, Portfolio 21 Global Equity and the Fidelity Select Envir and Alt Energy.

Appendix 3: European Green Mutual Funds

List of green mutual funds from the European market that invest mainly in the European area: A Plus Environnement 10, Allianz Eco Innovation, Allianz Euréco Equity, BMG Environnement, Echiquier Environnement, Ecureuil Bénéfices Environnement, EDR Ecosphere, Erste Responsible Stock Austria, Erste Responsible Stock Europe, Etoile Environnement, FCPI Innovation Pluriel, Federal Planète Bleue, Fructi Actions Environnement, GLG Global Sustainability Eq, LBBW Global Warming, LBPAM Responsible Actions Environnement, LGT Sustainable Equity Fd Europe, Mirova Europe Life Equity, Performance Environnement, SEB Ethical Europe and the Allianz Global Ecotrends.

List of green mutual funds from the European market that invest mainly in the global area: Alta Water, Amundi FDS Equity Global Aqua, Avenir Changement Climatique, AXA WF FRM Global Environment, BGF New Energy, Bluevalor Sustainable Lifestyle Brand Eq, BNP Paribas Aqua, CFM Environnement Développement Durable, Deka-Umweltinvest, DELOS Green Energy—Foreign Equity Fund, Delta Lloyd New Energy, Dexia Equity Sustainable Green Planet, DNB Renewable Energy, Dôm Prospective C, DWS Klimawandel, DWS Zukunftsressourcen, Ecology Stock FOCUS A, EIC Renewable Energy, Entheca Rareté, Erste WWF Stock Climate Change, Erste WWF Stock Umwelt, Evli Climate, FandC Global Climate Opp, FBG 4Elements, Green Power Eco Fund, Guinness Alternative Energy, IKANO Fds Alternative Energy and Water, Impact FDS Climate Change, Impax Environmental Markets, Invesco Umwelt-u.Nachhaltigkeits-Fonds, Jupiter JGF Climate Change Solu L €Acc, KBC Eco Alternative Energy, KBC Eco Climate Change, KBC Eco Water, KBI Alternative Energy, KBI Water, Living Planet Energy, Living Plante Global Environment, MAM Terra Nova, Nordea-1 Climate and Environment Equity, Parvest Environmental Opportunities, Pictet Clean Energy, Pictet Environment Megatrend Sel, Pictet Water, Pioneer FD Global Ecology, Polaris GEO Environmental, Prime Value Green, Provalor Cap Environnement, Quantex Environmental EUR, Quest Cleantech, RobecoSAM Smart Energy, RobecoSAM Smart Material, RobceoSAM Sustainable Climate, RobecoSAM Sustainable Water, Sarasin New Power Fund, Sarasin Sustainable Water, Swisscanto Equity Water, UBS ES Climate Change Acc, Variopartner Tareno Waterfund, Vontobel New Power, WIOF Green Energy Performance Fund, Schroder ISF Global Climate Change Equity, Schroder ISF Global Climnate CFG Equity, ACATIS Fair Value Aktien Global EUR, Ecofi Développement Durable, Erste Responsible Stock Global, Inconomentric Global Valor and the Swisscanto PF Green Investment Equity.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Muñoz, F., Vargas, M. & Marco, I. Environmental Mutual Funds: Financial Performance and Managerial Abilities. J Bus Ethics 124, 551–569 (2014). https://doi.org/10.1007/s10551-013-1893-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-013-1893-x

Keywords

JEL Classification

Search

Navigation