Assessing the Performance of ESG Mutual Funds and Traditional Funds in Emerging Economies

Abstract

This study investigates the performance of Environmental, Social, and Governance (ESG) mutual funds compared to conventional funds in the Indian financial market. The objective is to determine if ESG funds can match or surpass the financial performance of traditional funds. The methodology includes evaluating performance using the Carhart Four-Factor Model, Jensen's Alpha, Treynor Ratio, and Sharpe Ratio. Additionally, entropy measures—Shannon Entropy, Rényi Entropy, and Approximate Entropy—are employed to assess the volatility and complexity of fund returns. Findings indicate that while conventional funds often deliver higher raw returns, ESG funds excel in risk-adjusted performance, evidenced by higher Alpha and more favourable Treynor and Sharpe Ratios. Entropy analysis reveals that ESG funds exhibit higher volatility and complexity, as elevated Shannon, Rényi, and Approximate Entropy values indicate greater potential for significant returns and increased risk.