sustainability Article Risk and Performance of European Green and Conventional Funds Tiago Gonçalves 1, * , Diego Pimentel 2 and Cristina Gaio 1   Citation: Gonçalves, T.; Pimentel, D.; Gaio, C. Risk and Performance of European Green and Conventional Funds. Sustainability 2021, 13, 4226. https://doi.org/10.3390/su13084226 Academic Editor: Douglas Cumming Received: 18 March 2021 Accepted: 9 April 2021 Published: 10 April 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1 Advance/CSG, ISEG—Lisbon School of Economics & Management, Universidade de Lisboa, 1200-781 Lisboa, Portugal; cgaio@iseg.ulisboa.pt 2 ISEG—Lisbon School of Economics & Management, Universidade de Lisboa, 1200-781 Lisboa, Portugal; diegopimentel@msn.com * Correspondence: tiago@iseg.ulisboa.pt; Tel.: +351-213-925-800 Abstract: This paper analyzes how the risk-adjusted returns of green funds compare to those of conventional funds, between the years 2005 and 2020 for the European Union countries. Additionally, we tested how the performance of green funds correlates to the business cycle, subdividing their performance through expansionary and recessionary times. The findings are summarized as follows: our regression results demonstrated green and conventional funds exhibiting negative abnormal adjusted-returns against the developed world market benchmark for the single-factor and multifactor models. For the European market benchmark, we found environmental mutual funds presenting a positive performance for both models and conventional funds displaying negative results for the single-factor model and positive results for the multifactor model. The factor loadings for green funds indicated a negative load on momentum, book-to-market (HML) and size (SMB) factors, revealing a higher exposure to big and value companies. Subsampling per business cycle exhibited green mutual funds providing higher risk-adjusted returns to investors during crisis periods and mixed results for the non-crisis periods. Keywords: ESG; green funds; conventional funds; performance; risk; sustainable; investments 1. Introduction The increasing awareness about sustainability has led green investments to gain popularity among investors, especially after the COP 21 Paris Agreement and the UN Sustainable Development Goals, both aiming to tackle climate change and its effects on the planet and, therefore, on human life, environment, and economy. Companies are directly affected by these changes, and they have re-evaluated their behavior to meet new demands of the financial market. Investors and institutions are also realigning their asset allocation, given that sustainable firms are better attuned to endure through hard times, and therefore, offer steady risk-adjusted returns through time. Following this new trend, investment banks and asset management have increased their supply of green funds over recent years, providing many options for investors screening environmental, social and corporate governance (ESG) aspects on their portfolio allocation decisions. Although there is empirical evidence of the increased availability of environmental funds, no consensus has been reached on the risk-adjusted returns tendency between green and conventional funds. Some results show better risk-adjusted returns for green funds, and others for their conventional peers. Our study takes this opportunity to fill the literature gap by analyzing new data for green and conventional funds returns, exploring whether there is an upward tendency for green funds to outperform over time or if the classical conventional funds are still the ideal choice. To understand whether or not the relationship between green and conventional funds returns holds in different economic scenarios, we also studied their behavior over the Sustainability 2021, 13, 4226. https://doi.org/10.3390/su13084226 https://www.mdpi.com/journal/sustainability