Making sustainable investments does not mean giving up high returns. That’s according to a meta-study comparing the performance of sustainable and conventional funds, conducted by Dr. Christian Klein, Director of the Department of Corporate Finance at the University of Kassel, Germany.

Prof. Dr. Christian KleinDirector of the Department of Corporate Finance - University of Kassel
Kassel, Germany

Traditional savings accounts pay less and less interest. As a result, savers are looking for new possibilities to invest their cash. And sustainable, social, and ecologically compatible stocks and funds are becoming increasingly popular. They offer not only a clear conscience, but often high returns as well. “The study refutes the preconception that sustainable funds underperform or are less secure than conventional funds,” according to Dr. Christian Klein. He adds, “This fairy tale is simply untrue.”

For his meta-study Klein analyzed 35 empirical studies comparing the performances of sustainable funds with those of conventional funds. In contrast to previous meta-studies Klein did not focus only on returns, instead looking at the risk-return relationship. “15 studies detected absolutely no performance difference. Only six studies revealed a weaker performance for sustainable funds, but 14 studies showed a better performance,” according to Klein.  Sustainable funds are a little less risky than others, adds Klein: “That could have something to do with the fact that companies dedicated to sustainability and environmental protection are perceived positively by consumers. They are also often more reputable, and that means their operations are less risky.” The study, which was carried out in cooperation with Miriam Hofmann, is to be published in the industry magazine, “Business Research”.

„There is a need for explanation“  

That sustainable funds are perceived as underperformers by most investors, explains Dr. Christian Klein, has to do with the shorter track record of this relatively new market segment: „Especially for private investors, funds oriented toward sustainability have something in common with products like organic eggs: They seem better from an ethical standpoint but, from a financial standpoint, they also seem to be a bit more expensive.“ However, this assumption is not supported by the results of the study, which actually shows the opposite to be true: „It is important that funds provide not only returns, but that they provide returns in correlation with the risk involved. And, when one takes the risk-return relationship into account, sustainable funds are equally good or even better than conventional funds.“

According to Klein, sustainable funds seek out companies to invest in based on several environmental, social, and governance criteria. The share of such assets on the market is in absolute numerical terms actually quite high. In Germany, for example, over 12 billion euros have been invested in sustainable funds. But, in percentage terms, this number is paling when considering that less than two-percent of the money invested in funds has been put into sustainable funds. „We observe, however, that the demand is rising from year to year,“ says Klein. „The problem at the moment is that there is a need for explanation. People believe that when they invest in a politically correct fund they are giving their money away, similar to a donation. That is not the case.“

Source: University of Kassel, Department of Corporate Finance