The Effect of ESG Levels on Fund Performance and Cash Flows

As ESG-related sustainability issues are important, the size of SRI is increasing rapidly in the global market, and related research is being actively conducted, but the results are not consistent. So we consider it necessary to conduct research on SRI, particularly on various specific aspects such as data and research methodologies. Therefore, this study intends to contribute to the SRI-related research through the study using the data of Korea's public offering fund. This study analyzes the relationships among fund environmental, social, and governance (ESG) levels; fund performance; and fund cash flows in terms of socially responsible investments (SRI) for individual public offering funds currently under transaction. Additionally, this study analyzes the differences between the characteristics of ordinary equity funds and funds classified and sold as SRI funds in terms of fund performance and cash flow. We calculated the ESG scores of individual funds for empirical analysis and used them for univariate analysis and regression analysis. According to one analysis of the relationship between fund ESG levels and fund performance, higher ESG-grade funds either lead to higher risk-adjusted returns than other funds or there is no statistically significant difference. For SRI funds, we found no significantly different characteristics when compared to other fund groups in terms of return, risk, and ESG grade. In addition, according to analysis results on the relationship between fund ESG grades and fund cash flows, lower ESG-level funds showed greater net cash flows. Whether the fund was an SRI fund did not affect net cash flows. Our findings suggest meaningful implications for investors who want to make responsible investments and for policy makers who want to develop Korea's fund market. Finally, we expect more SRI-related studies to be conducted in Korea beyond the limitations of this study.