Funds with high ESG ratings: higher or lower returns and risk?

During the spring, CB Fonder supervised a master’s thesis in financial mathematics at KTH. The thesis is titled “Risk Management and Sustainability – A Study of Risk and Return in Portfolios With Different Levels of Sustainability” and focuses on the risk of funds divided by ESG ratings.

Our former intern Magnus Borg and his colleague Lucas Ternqvist discovered an intriguing relationship between risk and ESG ratings during this work. They analyzed sustainability/ESG data from MSCI for 3048 global equity funds, using historical data for 3, 5, and 10 years.

Their conclusion was that funds with a high ESG rating (AAA and AA) exhibited lower risk compared to funds with lower ratings. They also found that returns were positively correlated with ESG ratings: funds with higher ratings, on average, had higher returns.

The graph below depicts returns on the right axis and risk on the left axis. For the risk measure Expected Shortfall, a higher value (less negative) indicates lower risk. Funds with AAA ratings showed both the highest returns and the lowest risk, thus achieving a higher risk-adjusted return than other funds. The analysis is based on historical data for 5 years.

Both our funds, Save Earth Fund and European Quality Fund, have AA ratings.

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