The role of mutual funds in the sustainable energy sector

Abstract

The integration of renewable energy criteria in mutual fund investment decisions could channel private resources into the funding of environmentally related projects implemented by firms contributing to sustainable development. This paper examines the performance of European renewable energy funds that invest globally by comparing their risk-adjusted returns with those achieved by black energy and conventional mutual funds. It uses Carhart's model on a sample of 81 renewable energy funds, 125 black energy funds, and 4,337 conventional mutual funds. The results indicate that 32.1% of renewable mutual funds-most of which adopt energy producers, renewable energy technology, and energy efficiency-focused criteria-perform significantly better than the S&P Clean Energy market benchmark, this percentage being affected by the different states of the economy. However, none of them are able to beat the fossil fuel energy (S&P Global 1200 Energy Index) or conventional market benchmarks (S&P Global 1200 Index). Furthermore, 37.04% of renewable energy funds significantly underperform the S&P Global 1200 benchmark. Therefore, the investment in renewable energy funds has a financial cost for investors in relation to conventional fund investors.

Financial Performance of SDG Mutual Funds Focused on Biotechnology and Healthcare Sectors

“…The reduction of both diversifiable risk and monitoring and search costs allows biotechnology and healthcare mutual funds to outperform conventional mutual funds. However, this superior financial performance in relation to conventional mutual funds has not been found by previous studies focused on the renewable energy sector [2,4,5] in spite of incorporating mutual funds whose renewable energy specialized portfolios are diversified across countries in their samples, which indicates that the investment opportunities vary across sectors or areas of sustainable development goals-likely due to different stakeholder pressures in each area, as pointed by Martí-Ballester [37].…”

“…From this point of view, fund portfolios that concentrate all their stocks mainly in one specific sector, such as the healthcare or biotechnology sectors, could lose investment opportunities generated in other sectors, increasing their idiosyncratic risk, which lessens funds' risk-adjusted return. Recent empirical evidence provides support for modern portfolio theory in the energy sector [2][3][4] and in other specific sectors analyzed as a group [7], assuming that the state of the economy remains unchanged over time in global markets. However, managers usually adjust their management strategy to the economic situation by incorporating a dynamic trading strategy into the fund portfolios.…”

“…This study adds to previous finance literature by being, to the best of our knowledge, the first to analyze the financial performance of sustainable development goals (SDG)-related funds (so called thematic mutual funds) focused on the biotechnology and healthcare sectors (SDG 3). While previous studies have focused on analyzing SDG funds related to the water sector [1], the renewable energy sector [2][3][4][5][6] or several thematic sectors as a group [7], limited attention has been paid to mutual funds focused on sustainable development goals in the area of health, although the United Nations encourages the private sector to contribute to progress towards sustainable development goals by also investing in firms related to healthcare issues.…”

Disentangling the drivers of renewable energy investments: The role of behavioral factors

“…During the last decades, there is a significant lack of emphasis on investors' preferences when it comes to allocating capital to renewable energy sources (RES). Although factors influencing the community acceptance of renewables are recognized as being important in the understanding of policy effectiveness, the market acceptance of RES has received less attention from the existing literature (Wüstenhagen, Wolsink, & Bürer, 2007;Ozorhon, Batmaz, & Caglayan, 2018;Ballester, 2019;Venugopal & Shukla, 2019). 1 Researchers have mostly focused on technical and economic aspects of energy investments and have typically adopted a nonbounded rationality approach to explain how agents choose among uncertain options (Liu & Zeng, 2017;Masini & Menichetti, 2012;Oschlies, 2007;Painuly, 2001).…”

Sustainable Development Goals and Investment Strategies: The Profitability of Using Five-Factor Fama-French Alphas

“…To that end, researchers have employed multi-factor asset pricing models such as the Fama-French three-factor model [20] and the Carhart four-factor model [21] as well as the more recent Fama-French five-factor model [4]. These are of the works of Goldreyer and Diltz [22], Cummings [23], Bello [24], Bauer et al [25], Gregory and Whittaker [26], Jones et al [27], Cortez et al [28], Humphrey and Lee [29], Capelle and Monjon [30], Nofsinger and Varma [31], Lean et al [32], Leite and Cortez [33], Jin and Han [34] Joliet and Titova [3], Segura et al [15], Boermans and Galema [35], Martí-Ballester [36] and Martí-Ballester [37], among others.…”