European ESG and Cleantech

Mutual Fund Performance

T.F. Cojoianua, Dr. A.G.F. Hoepnerb

a Doctoral Researcher – Smith School of Enterprise and the Environment,

University of Oxford.b Associate Professor of Finance – ICMA Centre, Henley Business School,

University of Reading.

Presentation Outline1. Global Investment Outlook

2. European ESG, Cleantech and Conventional Mutual Fund Performance

3. Does Asset Manager’s ESG Sophistication Matter in Cleantech Mutual Fund Performance?

Setting the Scene – Global Equity/Debt Outstanding

Source: McKinsey Global Institute (2013) - Financial Assets Database Analysis (183 Countries)

Global Stock of Equity and Debt Outstanding ($ trillion) – constant 2011 exchange rates

Setting the Scene – New Cleantech Investment

Source: Bloomberg New Energy Finance (2014) (billion $ / year)

Research Aims1. Create a methodology that eliminates survivorship bias

from mutual fund performance studies.

2. Conduct a financial performance analysis which more closely matches the asset manager/fund selection process of asset owners.

Research Questions1. Who outperforms the market? Conventional, ESG or

green mutual funds?

2. Does asset manager’s sophistication in responsible investment make a difference to the performance of green mutual funds?

Fund Selection and Matching

Fund Type Number of Funds Unique Funds

Green* 37 37

Conventional** 111 matches 70

ESG/SRI** 36 matches

(Lehman fund not covered anymore)

21

*Green funds are selected from EurekaHedge Database.

**Conventional and ESG/SRI matches are obtained from Thomson Reuters Datastream.

• Lehnen & Hoepner (2009) match each of the 37 green European domiciled mutual funds with 3 corresponding conventional mutual funds and 1 ESG/SRI mutual fund.

• Matches have very close inception dates and sizes, as well as similar investment universe (European or Global Equities).

Mutual Fund Performance Measurement• Used a standard Carhart (1997) 4 factor model

tititiftmtiiftit MOMHMLSMBRRRR )(

Fund Return

Risk-Free Rate

AbnormalReturn

Market Coefficient

Market Return

Risk-Free Rate

Small Market Cap-

Big Market Cap(Growth Investment Strategy)

High – LowBook-to-Market Ratios

(Value Investment Strategy)

Momentum Investment Strategy

Results – Delisting Rate Post 2009

81%

19%

Green Funds Delisting Percentage (37 funds)

Active Delisted

63%

37%

Conventional Funds Delisting Percentage (70 funds)

Active Delisted

53%47%

ESG/SRI Funds Delisting Percentage (21 funds)

Active Delisted

Results – Financial Performance

38%

13%

49%

Green Funds Performance (37 funds)

59%

41%

Conventional Funds Performance (70 funds)

34%

33%

33%

ESG/SRI Funds Performance (21 funds)

Several observations• ESG/SRI European domiciled funds started pre-2009 tend to

have a higher probability of being de-listed than conventional or green funds and tend to underperform the market.

• Green funds tend to have a significant tilt towards small cap companies, suggesting that the low carbon technologies public equity space is yet to mature.

• Green funds tend to perform on average on par with conventional funds, and in the past 2 years have also been shown to outperform (Ibikunle & Steffen, 2014).

Is asset manager’s ESG technical expertise relevant in cleantech investing?

• All equity only green funds are selected from the CSSP/your SRI database with inception date starting 2008 (26 in total).

• Out of the 26 funds, 7 funds belong to asset managers who run only ESG investment strategies and products.

• The remaining 19 funds are run by asset managers who offer both conventional and responsible investment funds.

15%

57%

14%

14%

Green Funds (ESG Asset Management Houses -7 funds)

16%

26%

26%

32%

Green Funds (Generalist Asset Manager – 19 funds)

Is asset manager’s ESG technical expertise relevant in cleantech investing?

Thank you for your attention!

Email: theodor.cojoianu@seh.ox.ac.uk