Is Green the New Black? - an Empirical Study on the Correlation of CSR Initiatives and Profitability On
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Is green the new black? - An empirical study on the correlation of CSR initiatives and profitability on Nordic mutual funds Master’s Thesis 30 credits Programme: Master’s Programme in Accounting and Financial Management Specialisation: Financial Management Department of Business Studies Uppsala University Spring Semester of 2021 Date of Submission: 2021-08-02 Carla Amiri Supervisor: Gunilla Myreteg IS GREEN THE NEW BLACK? – An empirical study on the correlation of ESG performance and profitability on Nordic mutual funds Abstract This research examines whether Corporate Social Responsibility (CSR) initiatives impact fund financial performance of 46 Nordic mutual funds during the past five years (2016-2020). Previous studies have focused on which of the two alternatives generates a rewarding financial result. To complement previous research, this study focuses on the development of CSR - whether the gap formed between CSR initiatives and fund financial performance is moving closer towards each other based on the increased focus of ESG factors during the recent years. Two categories, strong and weak ESG performance, are juxtapositioned to find out at what stage the development is. Furthermore, analysis on which of the three categories: environmental, social or governance individually, is the driving factor of the development of CSR initiatives. Based on the matched pair methodology and hypothesis testing, funds with CSR initiatives have reached the point, in which they perform equally well to their peers without such motives. The underlying drivers behind the development are examined. Keywords: CSR, sustainable funds, fund financial performance, Nordic market Acknowledgments I would like to express my sincere gratitude for my supervisor Gunilla Myreteg for her valuable guidance, perspectives and constructive feedback during the entire process. 1 Table of Contents 1. Introduction ............................................................................................................. 4 1.1. Background .............................................................................................................. 4 1.2. Problematization ....................................................................................................... 5 1.3. Research Question..................................................................................................... 6 1.4. Purpose and Knowledge Contribution........................................................................... 6 1.5. Delimitation.............................................................................................................. 7 1.6. Structure .................................................................................................................. 7 2. Theoretical Framework.............................................................................................. 8 2.1. Introduction to ESG performance................................................................................. 8 2.2. Forces behind CSR practice ......................................................................................... 9 2.3. Purpose of CSR - support ............................................................................................ 9 2.4. Purpose of CSR - critique ...........................................................................................10 2.5. ESG in funds ............................................................................................................10 2.6. ESG and financial performance ...................................................................................11 2.7. Modern Portfolio Theory ...........................................................................................13 2.8. Diversification ..........................................................................................................13 2.9. Risk ........................................................................................................................14 2.10. Efficient Market Hypothesis ..............................................................................14 2.11. Jensen’s alpha.................................................................................................15 2.12. Summary........................................................................................................15 3. Research Design.......................................................................................................17 3.1. Introduction ............................................................................................................17 3.2. Research Method .....................................................................................................17 3.3. Matched-pair ...........................................................................................................17 3.4. Mutual fund performance..........................................................................................18 3.5. Capital Asset Pricing Model ........................................................................................20 3.6. Jensen’s alpha..........................................................................................................21 3.7. Sharpe ratio .............................................................................................................21 3.8. Treynor ratio............................................................................................................22 3.9. Hypothesis formulation .............................................................................................23 3.10. Hypothesis testing ...........................................................................................24 3.11. Scientific perspective .......................................................................................26 3.12. Reliability and Validity ......................................................................................27 3.13. Source critical consideration .............................................................................27 3.14. Research ethical reflection ................................................................................28 2 4. Data .......................................................................................................................29 4.1. Data description .......................................................................................................28 4.2. Sustainalytics ...........................................................................................................30 4.3. Benchmark .............................................................................................................32 4.4. Risk free rate ...........................................................................................................32 4.5. Limitation................................................................................................................33 5. Empirical results ......................................................................................................34 5.1. Empirical statistics ....................................................................................................34 5.2. Hypothesis testing ....................................................................................................37 5.3. Environmental, Social, Governance .............................................................................39 6. Discussion ...............................................................................................................42 6.1. Findings ..................................................................................................................42 6.2. Critical reflection ......................................................................................................48 7. Conclusion ..............................................................................................................49 7.1. Conclusions .............................................................................................................49 7.2. Limitations ..............................................................................................................49 7.3. Future Research .......................................................................................................50 8. References ..............................................................................................................52 3 1. Introduction The introductory section presents the background and motivation for conducting empirical research on the development of corporate social responsibility initiatives in relation to its corporate financial performance, followed by introducing the research question. Finally, the section will end with a compressed presentation on the upcoming sections. 1.1. Background Global warming has been raised as one of the most significant causes of species extinctions in this century. According to Intergovernmental Panel on Climate Change (IPCC), a rise of 1.5°C on average could lead to the extinction of crucial ecosystems, poverty and 140 million climate migrants by 2050. In January 2016, United Nations, and its’ 193 countries, introduced the 2030 Agenda with 17 Sustainable Development Goals (SDGs), which have been implemented since then. Through these mutual goals, countries are committed to developing the world toward a sustainable and equal future by, e.g. eliminating poverty and hunger, ensuring human rights and gender equality,