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Open AccessOpen Access JUSTC Management 27 April 2023

How can ESG funds improve their performance? Based on the DEA-Malmquist productivity index and fsQCA method

  • School of Economics, Hefei University of Technology, Hefei 230009, China

Cite this:
https://doi.org/10.52396/JUSTC-2023-0017
More Information
  • Author Bio:

    Qiong Xia is currently an Associate Professor at the Hefei University of Technology. She received her Ph.D. degree in Management from the University of Science and Technology of China in 2012. Her research mainly focuses on efficiency evaluation and environmental efficiency

    Fangqing Wei is currently an Associate Professor at the Hefei University of Technology. He received his Ph.D. degree in Management from the University of Science and Technology of China in 2018. His current research interests include efficiency and productivity analysis, and data envelopment analysis

  • Corresponding author: E-mail: weifq@hfut.edu.cn
  • Received Date: 15 February 2023
  • Accepted Date: 03 April 2023
    • Available Online: 27 April 2023
    Abstract

  • Abstract

    In China, ESG funds are still in the early stage of development, and how to improve their performance level has become an urgent problem. Based on 26 ESG funds in 2018–2021, we use the DEA-Malmquist productivity index method to evaluate the performance of ESG funds at two levels, static and dynamic, and apply the fsQCA approach to explore the performance improvement path of ESG funds. Overall, ESG funds perform well, but there are significant differences among them. The total factor productivity of ESG funds shows a decreasing trend during the study period. There are three paths to improve the performance of ESG funds. The 1st path is to maintain a low concentration of holdings and reduce the frequency of fund position adjustments based on increasing fund size. The 2nd path is to diversify into stocks with high ESG scores based on increasing fund size. The 3rd path is to hold stocks with high ESG scores for a long time based on increasing fund size. Concerning the results of the empirical analysis, it proposes to improve the ESG rating system, broaden the market scale of ESG funds at a steady gait, and gradually optimize fund managers’ investment strategies.

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    Abstract

    In China, ESG funds are still in the early stage of development, and how to improve their performance level has become an urgent problem. Based on 26 ESG funds in 2018–2021, we use the DEA-Malmquist productivity index method to evaluate the performance of ESG funds at two levels, static and dynamic, and apply the fsQCA approach to explore the performance improvement path of ESG funds. Overall, ESG funds perform well, but there are significant differences among them. The total factor productivity of ESG funds shows a decreasing trend during the study period. There are three paths to improve the performance of ESG funds. The 1st path is to maintain a low concentration of holdings and reduce the frequency of fund position adjustments based on increasing fund size. The 2nd path is to diversify into stocks with high ESG scores based on increasing fund size. The 3rd path is to hold stocks with high ESG scores for a long time based on increasing fund size. Concerning the results of the empirical analysis, it proposes to improve the ESG rating system, broaden the market scale of ESG funds at a steady gait, and gradually optimize fund managers’ investment strategies.

    • Public Summary

    • This study uses the DEA-Malmquist productivity index approach to evaluate ESG fund performance from perspectives of static and dynamic.
    • Considering investors’ utility preferences, this study incorporates the higher order moments of fund returns into the evaluation system.
    • This study uses the fsQCA method to explore the improvement paths of ESG fund performance.

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    • References(37)
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    Busch T, Bauer R, Orlitzky M. Sustainable development and financial markets: Old paths and new avenues. Business & Society, 2016, 55 (3): 303–329. doi: 10.1177/0007650315570701
    [2]
    Pástor Ľ, Stambaugh R F, Taylor L A. Sustainable investing in equilibrium. Journal of Financial Economics, 2021, 142 (2): 550–571. doi: 10.1016/j.jfineco.2020.12.011
    [3]
    Van Duuren E, Plantinga A, Scholtens B. ESG integration and the investment management process: Fundamental investing reinvented. Journal of Business Ethics, 2016, 138 (3): 525–533. doi: 10.1007/s10551-015-2610-8
    [4]
    Charnes A, Cooper W W, Rhodes E. Measuring the efficiency of decision making units. European Journal of Operational Research, 1978, 2 (6): 429–444. doi: 10.1016/0377-2217(78)90138-8
    [5]
    Guo J, Ma C, Zhou Z. Performance evaluation of investment funds with DEA and higher moments characteristics: Financial engineering perspective. Systems Engineering Procedia, 2012, 3: 209–216. doi: 10.1016/j.sepro.2011.10.033
    [6]
    Ragin C C, Strand S I. Using qualitative comparative analysis to study causal order: Comment on Caren and Panofsky (2005). Sociological Methods & Research, 2008, 36 (4): 431–441. doi: 10.1177/0049124107313903
    [7]
    Wang K, Li T. Current status, problems and prospects of ESG fund development. Finance and Accounting Monthly, 2022 (6): 147–154. (in Chinese) doi: 10.19641/j.cnki.42-1290/f.2022.06.019
    [8]
    Jagannathan R, Ravikumar A, Sammon M. Environmental, social, and governance criteria: Why investors are paying attention. Cambridge, MA: National Bureau of Economic Research, 2017: Working Paper 24063.
    [9]
    Ma X L. Do ESG investment strategies have a mine clearance function? An empirical study based on the Chinese A-share market. Northern Finance, 2019 (5): 14–19. (in Chinese) doi: 10.16459/j.cnki.15-1370/f.2019.05.004
    [10]
    Mohanty S S, Mohanty O, Ivanof M. Alpha enhancement in global equity markets with ESG overlay on factor-based investment strategies. Risk Management, 2021, 23 (3): 213–242. doi: 10.1057/s41283-021-00075-6
    [11]
    Pedersen L H, Fitzgibbons S, Pomorski L. Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 2021, 142 (2): 572–597. doi: 10.1016/j.jfineco.2020.11.001
    [12]
    Díaz V, Ibrushi D, Zhao J. Reconsidering systematic factors during the COVID-19 pandemic – The rising importance of ESG. Finance Research Letters, 2021, 38: 101870. doi: 10.1016/j.frl.2020.101870
    [13]
    Markowitz H M. Portfolio selection. Journal of Finance, 1952, 7 (1): 77–91. doi: 10.1111/j.1540-6261.1952.tb01525.x
    [14]
    Sharpe W F. Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 1964, 19 (3): 425–442. doi: 10.1111/j.1540-6261.1964.tb02865.x
    [15]
    Treynor J. How to rate management of investment funds. Harvard Business Review, 1965, 43 (1): 63–75.
    [16]
    Sharpe W F. Mutual fund performance. The Journal of Business, 1966, 39 (1): 119–138. doi: 10.1086/294846
    [17]
    Jensen M C. Problems in selection of security portfolios. Journal of Finance, 1968, 23 (2): 389–419. doi: 10.1111/j.1540-6261.1968.tb00815.x
    [18]
    Ross S A. The arbitrage theory of capital asset pricing. In: Handbook of the Fundamentals of Financial Decision Making: In 2 Parts. Singapore: World Scientific, 2013: 11–30.
    [19]
    Fama E F, French K R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 1993, 33 (1): 3–56. doi: 10.1016/0304-405X(93)90023-5
    [20]
    Carhart M M. On persistence in mutual fund performance. The Journal of Finance, 1997, 52 (1): 57–82. doi: 10.1111/j.1540-6261.1997.tb03808.x
    [21]
    Fama E F, French K R. Multifactor explanations of asset pricing anomalies. The Journal of Finance, 1996, 51 (1): 55–84. doi: 10.1111/j.1540-6261.1996.tb05202.x
    [22]
    Treynor J, Mazuy K. Can mutual funds outguess the market? Harvard Business Review, 1966, 44 (4): 131–136.
    [23]
    Henriksson R D, Merton R C. On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. Journal of Business, 1981, 54 (4): 513–533. doi: 10.1086/296144
    [24]
    Chang E C, Lewellen W G. Market timing and mutual fund investment performance. Journal of Business, 1984, 57 (1): 57–72. doi: 10.1086/296224
    [25]
    Wang K, Huang S. Using fast adaptive neural network classifier for mutual fund performance evaluation. Expert Systems with Applications, 2010, 37 (8): 6007–6011. doi: 10.1016/j.eswa.2010.02.003
    [26]
    Chen G, Li G J. Evaluation of relative investment performance of securities investment funds. Journal of Sichuan University (Philosophy and Social Science Edition), 2001, 2: 32–37. (in Chinese)
    [27]
    Ding W H, Feng Y J, Kang Y H. Investment fund performance evaluation based on DEA. Quantitative Economic and Technical Economics Research, 2002 (3): 98–101. (in Chinese) doi: 10.3969/j.issn.1000-3894.2002.03.026
    [28]
    Elton E J, Gruber M J, Das S, et al. Efficiency with costly information: A reinterpretation of evidence from managed portfolios. The Review of Financial Studies, 1993, 6 (1): 1–22. doi: 10.1093/rfs/6.1.1
    [29]
    Dellva W L, Olson G T. The relationship between mutual fund fees and expenses and their effects on performance. Financial Review, 1998, 33 (1): 85–104. doi: 10.1111/j.1540-6288.1998.tb01609.x
    [30]
    Levis M, Liodakis M. The profitability of style rotation strategies in the United Kingdom. The Journal of Portfolio Management, 1999, 26 (1): 73–86. doi: 10.3905/jpm.1999.319770
    [31]
    Kacperczyk M, Sialm C, Zheng L. On the industry concentration of actively managed equity mutual funds. The Journal of Finance, 2005, 60 (4): 1983–2011. doi: 10.1111/j.1540-6261.2005.00785.x
    [32]
    Kong D M, Li J Y, Xing J P, et al. Studies on the industry concentration and performance of mutual funds. Management Review, 2010, 22 (4): 17–25, 86. (in Chinese) doi: 10.14120/j.cnki.cn11-5057/f.2010.04.015
    [33]
    Liu C, Lyu R J. Research on the path of optimizing the grouping of workforce skill structure: An analysis based on QCA method. Economy and Management, 2021, 35 (3): 74–79. doi: 10.3969/j.issn.1003-3890.2021.03.011
    [34]
    Huang S Z. Greenwashing and anti-greenwashing in ESG reporting. Finance and Accounting Monthly, 2022 (1): 3–11. (in Chinese) doi: 10.19641/j.cnki.42-1290/f.2022.01.001
    [35]
    Schneider C Q, Wagemann C. Set-Theoretic Methods for the Social Sciences: A Guide to Qualitative Comparative Analysis. Cambridge, UK: Cambridge University Press, 2012.
    [36]
    Fiss P C. Building better causal theories: A fuzzy set approach to typologies in organization research. Academy of Management Journal, 2011, 54 (2): 393–420. doi: 10.5465/amj.2011.60263120
    [37]
    Meuer J, Rupietta C, Backes-Gellner U. Layers of co-existing innovation systems. Research Policy, 2015, 44 (4): 888–910. doi: 10.1016/j.respol.2015.01.013
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    [1]
    Busch T, Bauer R, Orlitzky M. Sustainable development and financial markets: Old paths and new avenues. Business & Society, 2016, 55 (3): 303–329. doi: 10.1177/0007650315570701
    [2]
    Pástor Ľ, Stambaugh R F, Taylor L A. Sustainable investing in equilibrium. Journal of Financial Economics, 2021, 142 (2): 550–571. doi: 10.1016/j.jfineco.2020.12.011
    [3]
    Van Duuren E, Plantinga A, Scholtens B. ESG integration and the investment management process: Fundamental investing reinvented. Journal of Business Ethics, 2016, 138 (3): 525–533. doi: 10.1007/s10551-015-2610-8
    [4]
    Charnes A, Cooper W W, Rhodes E. Measuring the efficiency of decision making units. European Journal of Operational Research, 1978, 2 (6): 429–444. doi: 10.1016/0377-2217(78)90138-8
    [5]
    Guo J, Ma C, Zhou Z. Performance evaluation of investment funds with DEA and higher moments characteristics: Financial engineering perspective. Systems Engineering Procedia, 2012, 3: 209–216. doi: 10.1016/j.sepro.2011.10.033
    [6]
    Ragin C C, Strand S I. Using qualitative comparative analysis to study causal order: Comment on Caren and Panofsky (2005). Sociological Methods & Research, 2008, 36 (4): 431–441. doi: 10.1177/0049124107313903
    [7]
    Wang K, Li T. Current status, problems and prospects of ESG fund development. Finance and Accounting Monthly, 2022 (6): 147–154. (in Chinese) doi: 10.19641/j.cnki.42-1290/f.2022.06.019
    [8]
    Jagannathan R, Ravikumar A, Sammon M. Environmental, social, and governance criteria: Why investors are paying attention. Cambridge, MA: National Bureau of Economic Research, 2017: Working Paper 24063.
    [9]
    Ma X L. Do ESG investment strategies have a mine clearance function? An empirical study based on the Chinese A-share market. Northern Finance, 2019 (5): 14–19. (in Chinese) doi: 10.16459/j.cnki.15-1370/f.2019.05.004
    [10]
    Mohanty S S, Mohanty O, Ivanof M. Alpha enhancement in global equity markets with ESG overlay on factor-based investment strategies. Risk Management, 2021, 23 (3): 213–242. doi: 10.1057/s41283-021-00075-6
    [11]
    Pedersen L H, Fitzgibbons S, Pomorski L. Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 2021, 142 (2): 572–597. doi: 10.1016/j.jfineco.2020.11.001
    [12]
    Díaz V, Ibrushi D, Zhao J. Reconsidering systematic factors during the COVID-19 pandemic – The rising importance of ESG. Finance Research Letters, 2021, 38: 101870. doi: 10.1016/j.frl.2020.101870
    [13]
    Markowitz H M. Portfolio selection. Journal of Finance, 1952, 7 (1): 77–91. doi: 10.1111/j.1540-6261.1952.tb01525.x
    [14]
    Sharpe W F. Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 1964, 19 (3): 425–442. doi: 10.1111/j.1540-6261.1964.tb02865.x
    [15]
    Treynor J. How to rate management of investment funds. Harvard Business Review, 1965, 43 (1): 63–75.
    [16]
    Sharpe W F. Mutual fund performance. The Journal of Business, 1966, 39 (1): 119–138. doi: 10.1086/294846
    [17]
    Jensen M C. Problems in selection of security portfolios. Journal of Finance, 1968, 23 (2): 389–419. doi: 10.1111/j.1540-6261.1968.tb00815.x
    [18]
    Ross S A. The arbitrage theory of capital asset pricing. In: Handbook of the Fundamentals of Financial Decision Making: In 2 Parts. Singapore: World Scientific, 2013: 11–30.
    [19]
    Fama E F, French K R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 1993, 33 (1): 3–56. doi: 10.1016/0304-405X(93)90023-5
    [20]
    Carhart M M. On persistence in mutual fund performance. The Journal of Finance, 1997, 52 (1): 57–82. doi: 10.1111/j.1540-6261.1997.tb03808.x
    [21]
    Fama E F, French K R. Multifactor explanations of asset pricing anomalies. The Journal of Finance, 1996, 51 (1): 55–84. doi: 10.1111/j.1540-6261.1996.tb05202.x
    [22]
    Treynor J, Mazuy K. Can mutual funds outguess the market? Harvard Business Review, 1966, 44 (4): 131–136.
    [23]
    Henriksson R D, Merton R C. On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. Journal of Business, 1981, 54 (4): 513–533. doi: 10.1086/296144
    [24]
    Chang E C, Lewellen W G. Market timing and mutual fund investment performance. Journal of Business, 1984, 57 (1): 57–72. doi: 10.1086/296224
    [25]
    Wang K, Huang S. Using fast adaptive neural network classifier for mutual fund performance evaluation. Expert Systems with Applications, 2010, 37 (8): 6007–6011. doi: 10.1016/j.eswa.2010.02.003
    [26]
    Chen G, Li G J. Evaluation of relative investment performance of securities investment funds. Journal of Sichuan University (Philosophy and Social Science Edition), 2001, 2: 32–37. (in Chinese)
    [27]
    Ding W H, Feng Y J, Kang Y H. Investment fund performance evaluation based on DEA. Quantitative Economic and Technical Economics Research, 2002 (3): 98–101. (in Chinese) doi: 10.3969/j.issn.1000-3894.2002.03.026
    [28]
    Elton E J, Gruber M J, Das S, et al. Efficiency with costly information: A reinterpretation of evidence from managed portfolios. The Review of Financial Studies, 1993, 6 (1): 1–22. doi: 10.1093/rfs/6.1.1
    [29]
    Dellva W L, Olson G T. The relationship between mutual fund fees and expenses and their effects on performance. Financial Review, 1998, 33 (1): 85–104. doi: 10.1111/j.1540-6288.1998.tb01609.x
    [30]
    Levis M, Liodakis M. The profitability of style rotation strategies in the United Kingdom. The Journal of Portfolio Management, 1999, 26 (1): 73–86. doi: 10.3905/jpm.1999.319770
    [31]
    Kacperczyk M, Sialm C, Zheng L. On the industry concentration of actively managed equity mutual funds. The Journal of Finance, 2005, 60 (4): 1983–2011. doi: 10.1111/j.1540-6261.2005.00785.x
    [32]
    Kong D M, Li J Y, Xing J P, et al. Studies on the industry concentration and performance of mutual funds. Management Review, 2010, 22 (4): 17–25, 86. (in Chinese) doi: 10.14120/j.cnki.cn11-5057/f.2010.04.015
    [33]
    Liu C, Lyu R J. Research on the path of optimizing the grouping of workforce skill structure: An analysis based on QCA method. Economy and Management, 2021, 35 (3): 74–79. doi: 10.3969/j.issn.1003-3890.2021.03.011
    [34]
    Huang S Z. Greenwashing and anti-greenwashing in ESG reporting. Finance and Accounting Monthly, 2022 (1): 3–11. (in Chinese) doi: 10.19641/j.cnki.42-1290/f.2022.01.001
    [35]
    Schneider C Q, Wagemann C. Set-Theoretic Methods for the Social Sciences: A Guide to Qualitative Comparative Analysis. Cambridge, UK: Cambridge University Press, 2012.
    [36]
    Fiss P C. Building better causal theories: A fuzzy set approach to typologies in organization research. Academy of Management Journal, 2011, 54 (2): 393–420. doi: 10.5465/amj.2011.60263120
    [37]
    Meuer J, Rupietta C, Backes-Gellner U. Layers of co-existing innovation systems. Research Policy, 2015, 44 (4): 888–910. doi: 10.1016/j.respol.2015.01.013
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