Measuring the efficiency of mutual funds: Does ESG controversies score affect the mutual fund performance during the COVID-19 pandemic?

Abstract

This research investigates the influence of Environmental, Social, and Governance (ESG) performance on mutual fund efficiency during the COVID-19 pandemic. Employing Data Envelopment Analysis (DEA) and hypothesis testing, we examine the effect of ESG controversies scores on mutual fund performance. Our sample comprises 17,961 mutual funds worldwide, with available data during the later phase of the pandemic. Mutual fund performance is evaluated using the DEA methodology, and efficiency scores are derived from the DEA portfolio efficiency index. To explore the impact of ESG controversies scores on mutual fund performance, the sample is divided into two categories based on the ESG controversies score quartile. The findings demonstrate that mutual funds with higher ESG controversies scores, which indicate fewer ESG controversies, outperformed those with lower scores. Specifically, mutual funds embroiled in fewer ESG controversies exhibited higher financial efficiency, regardless of their geographical investment area. These findings offer essential insights for both investors and mutual fund managers. Retail and institutional investors could recognize the potential performance gains associated with investing in socially responsible mutual funds during crisis periods such as the COVID-19 pandemic. Furthermore, mutual fund managers should consider avoiding securities with more ESG controversies in their portfolios, considering that ESG controversies could have an adverse impact on financial efficiency during periods of health, environmental, or market crises. While our study contributes valuable insights, it is subject to limitations due to the unavailability of time-series data for mutual funds during the COVID-19 pandemic. Nonetheless, it represents the first attempt to utilize the ESG controversies score as a determinant of mutual fund financial efficiency during the pandemic era.