Extract

This study compares the carbon footprints, performance, and risk characteristics of the eight largest Traditional equity mutual funds (by asset size) with the eight largest Responsible equity mutual funds in several key asset categories - Large Cap Blend, Large Cap Growth and Mid Cap Blend. The study aims to evaluate the effects of environmental, social, and governance (ESG) analysis employed by responsible investment managers, which is believed to give them a more comprehensive understanding of the companies they invest in.

While traditionally managed mutual funds use an investment approach that relies solely on traditional financial analysis, responsible investment managers incorporate both traditional financial analysis and ESG analysis. The carbon footprint of each fund has been measured to assess the extent to which ESG analysis is correlated with carbon risks and returns.

Findings show that the funds incorporating ESG analysis in this study outperformed over one and three-year periods and exhibited significantly higher alpha, or risk-adjusted performance over the three-year period ending 30 June 2010. They also demonstrated smaller carbon footprints than the Traditional funds and could therefore be less exposed to the rising costs of emitting greenhouse gas emissions under planned climate change policy measures.