Project summary

This project aims to investigate whether differences in the behavioural maturity of underlying holdings help explain performance variation among SDG thematic equity funds.

Building on Imperial’s behavioural sustainability research, which suggests that conventional ESG ratings tend to place greater emphasis on preparatory and compliance-oriented corporate actions, while more transformational forms of sustainability behaviour may be associated with risk-adjusted alpha, this project shifts the unit of analysis from individual firms to investment funds. Although SDG thematic funds are designed to align capital with sustainability objectives, the extent to which they actually invest in companies undertaking transformational sustainability initiatives may vary substantially across funds.

The project therefore examines whether differences in portfolio composition, specifically exposure to firms exhibiting higher levels of transformational behaviour, are associated with differences in fund performance. This moves the analysis upstream: from examining how corporate sustainability behaviour affects individual stock returns to investigating how fund managers' portfolio construction decisions influence the performance of sustainable investment products.

Methodology

The empirical analysis will examine approximately 200 SDG thematic equity funds over a 3–5 year period, using annual holdings, portfolio weights and fund returns to construct a fund-level panel dataset.

A Transformation Exposure Score will be constructed to measure each fund’s exposure to transformational behaviour:

Transformation Exposure Score = Σ (Portfolio Weight × Firm Transformation Score)

The firm-level score will follow the behavioural maturity framework developed in the GOLDEN Sustainability Dataset, where transformation refers to sustainability-driven innovation and strategic change embedded within firms’ core operations and value chains.

The relationship between transformation exposure and fund performance will then be tested using panel regression.

Expected outcomes

The primary hypothesis is that funds with greater exposure to transformational companies achieve superior risk-adjusted performance.

The research will test whether:

• Higher Transformation Exposure Scores are associated with higher subsequent returns.
• This relationship persists after adjusting for risk.
• Funds with consistently high transformation exposure demonstrate more persistent performance advantages.

Potential impact

Achieving the UN SDGs requires an estimated $5 trillion of additional investment each year. However, the challenge is not a lack of money, as global financial assets exceed $560 trillion. Even a small shift in how capital is allocated could significantly narrow the SDG financing gap.

By comparing how different funds allocate capital and how they perform over time, the research asks whether directing investment toward companies undertaking deeper, structural sustainability initiatives leads to better outcomes for both investors and society. Ultimately, it aims to show that sustainable investment is not a cost, but an opportunity, encouraging portfolio managers to rethink their allocations in ESG thematic funds.