ESG Activeness and Active Performance: a Performance Attribution Model of Mutual Funds

Abstract

This study investigates the relationship between the ESG Activeness and the financial performance of mutual funds, introducing a novel metric called "ESG Activeness" to measure the degree of deviation between a fund's ESG ratings and those of its benchmark. Furthermore, the tracking difference of the Morningstar Sustainability Rating for the period of analysis is used. Using a sample of European mutual funds domiciled in Luxembourg, the study applies the Fama-French three-factor model, augmented with the ESG Activeness metric, to assess the impact of ESG considerations on fund returns. The analysis includes both an initial sample consisting of 102 funds and an adapted sample, with the latter focusing on funds with a positive MSR tracking difference and high ESG Activeness. The results indicate that while ESG Activeness does not have a statistically significant impact on performance in either sample, traditional market factors such as the market excess return (Mrkt_Rf_t) and size (SMB_t) remain significant predictors. The adapted sample shows a negative relationship between a positive MSR tracking difference and funds’ returns. This research contributes to the growing body of literature on sustainable investing, offering new insights into how active ESG management influences fund performance.