Mutual Fund Outperformance - Does sustainability come at a cost?

Following the modern portfolio theory, sustainable investing should lead to a less optimal portfolio due to it limiting its investment universe. A lot of literature has evaluated the performance of sustainable investing, especially as it has seen an immense growth over the years. One interesting findingis that over the years the interest in sustainability has been increasing and so has its performance. This paper tries to investigate if sustainable investing comes at the cost of financial risk-adjusted performance.Calculating Jensen’s alpha as the first performance measure using the CAPM, the Fama-French three-factor model, the Carhart four-factor model, the market timing model and the Treynor and Mazuy model; with the Sharpe ratio as a secondary performance measure. A total of 1,140 global equity mutual funds will be analysed in this paper. The funds are divided into 3 categories, high sustainable mutual funds, low sustainable mutual funds and conventional mutual funds. The results show that for the CAPM the conventional funds slightly outperform the highand low funds. The other measures show no underperformance for the high funds, with the market timing model and Treynor and Mazuy model showing that the high funds outperform their conventional andlow counterparts.