Risk-Adjusted Performance of Sustainable Mutual Funds: Evidence from Emerging and Developed Markets

Abstract

The paper analyzes the performance of sustainable mutual funds in both emerging and developed markets with respect to three most popular risk-adjusted performance metrics: Treynor ratio, Jensen Alpha and Sharpe ratio. This paper analyzes 312 sustainable mutual funds that are operating in 15 countries within the time frame of 5 years (2019-2023) and assesses the potential of Environmental, Social, and Governance (ESG) investment strategies to achieve better risk-adjusted returns than traditional funds. The results show that sustainable funds in more developed markets exhibit better Jensen’s Alpha performance (0.47% monthly excess return, p<0.01) while emerging market sustainable funds exhibit higher Treynor ratios (0.051 vs 0.042). Sharpe ratio analysis indicates mixed performance across both segments, challenging the traditional assumption that ESG factors necessarily compromise financial returns. The study contributes to the growing literature on sustainable finance by providing robust empirical evidence on the risk-return profile of ESG investments across diverse market conditions and regulatory environments.