How has the performance of ESG versus non-ESG funds in the European market evolved since the start of the war in Ukraine, and what strategic shifts have investment funds made in response?

Abstract

This thesis investigates whether sustainable funds demonstrated different performance, risk, and flow dynamics compared to conventional funds in the European equity market following the Russian invasion of Ukraine. The analysis focuses on SFDR Article 9 funds, representing sustainable investments, and Article 6 funds, representing conventional peers. A robustness check extends the analysis by combining SFDR classifications with Morningstar Sustainability Ratings, comparing Article 8 and 9 funds with high ratings to Article 6 funds with low ratings. To ensure comparability between the two groups, propensity score matching was applied, followed by a Difference-in-Differencesframework to capture changes before and after the invasion. The study examines risk-adjusted performance (Sharpe, Sortino, and alpha), tail risk (VaR and ES), monthly net flows, and flow resilience. The dataset comprises actively managed, euro-denominated European equity funds collected from Morningstar Direct, covering the period from February 2021 to February 2023. The results provide a nuanced picture. Article 9 funds outperformed Article 6 peers on a risk-adjusted basis after the invasion, showing higher Sharpe and Sortino ratios and significant positive alpha. However, no systematic differences emerged in tail risk, suggesting that sustainable funds did not display greater resilience against extreme downside events. Similarly, flow analysis shows no evidence of stronger investor loyalty for Article 9 funds, with net flows and resilience broadly comparable across groups. These findings remain robust under the alternative sustainability classification. Overall, the evidence suggests that while sustainable funds delivered superior adjusted returns during the conflict period, this advantage did not extend to lower tail risk or investor loyalty. The study contributes to the literature by combining sustainability classifications with causal inference methods. It offers new insights into the evolving dynamics of ESG investing during geopolitical crisis