The ESG Performance Debate : A Quantitative Study comparing performance in ESG and Traditional Funds Within the Swedish Market

The emergence of sustainable investing is at is peek currently across financial markets, which sparks the question of whether ESG (Environmental, Social, and Governance) factors influence fund performance. Especially within the Swedish market, because of that Sweden is in the forefront of Sustainable investing and ESG funds. This thesis explores the financial, and risk-adjusted performance of ESG funds compared to traditional funds in Sweden. The thesis adopts a positivist, deductive and quantitative approach in methodology to construct two different portfolios consisting of a total of approximately 250 funds in Sweden, to address the research question “Does the performance of ESG funds differ from the performance of traditional funds in Sweden?”. The two portfolios were constructed using Morningstar Sweden’s ESG ratings. Portfolio 1 consists of funds with ESG scores of 1 – 2 which is more traditional funds with lower sustainability ratings. Whilst Portfolio 2 consists of funds with ESG scores of 3 – 5, which is ESG funds since their high level of sustainability ratings. The study uses a three-year dataset from 2022 to 2024 to conduct t-tests, OLS regressions, and time series analyses to assess performance metrics such as Sharpe Ratio, Sortino Ratio, Treynor Ratio, Jensen’s Alpha, Volatility and Beta. The findings of these tests indicate that Portfolio 2 persistently outperformed Portfolio 1 across most performance and risk metrics. The findings show that there is a significance in Sharpe Ratio and Sortino Ratio for Portfolio 2 compared with Portfolio 1 which indicates that the risk-adjusted return for Portfolio 2 is significantly greater. The social component of ESG shows a significant relationship with higher return and lower systematic risk (beta). These results support the theoretical assumptions of Modern Portfolio Theory, Stakeholder Theory, Capital Asset Pricing Model, Fama-French Five Factor Model and Legitimacy Theory. As the European Union continues to establish relevant regulatory frameworks through Corporate Social Reporting Directive and SFDR, the relevance of ESG funds is a driver for better performance and risk-adjusted return.