Data Collection

used. However, a more conservative value has been set as the critical value for the VIF test of the regression models in this study.

A VIF value greater than 2.5 is considered to be problematic.⁸

The VIF tests in this study show no indications of multicollinearity in the regression models. All values are smaller than the critical value and are closer to 1, i.e. a VIF value near 1 suggests that multicollinearity is not a problem for that independent variable (Wooldridge, 2013) .

6.2.5. Presence of outliers in the data set

The presence of outliers might cause a non-identical distribution. Outliers are anomalous values in the data that might affect the fitted coefficients, which will result in a poor fit in relation to the data observations. The presence of outliers in the data set was checked for through a histogram and no anomalous values were detected.

Scandinavia

The SRI fund services database is a supplementary resource to identify ethical funds in Europe.

The SRI fund service is the database, which is most frequently used by researchers for the European fund market. Vigeo in cooperation with Morningstar have created the “SRI Fund Service”, where approximately 500 European ethical funds are listed. The funds are analyzed and ranked according to a set of ethical criteria. Vigeo merged with Ethical Investment Research Service (Eiris), which is a global provider of environmental, social and governance (ESG) research, in the beginning of 2016. However, a new common site was under construction during the writing of this thesis and the required data could not be retrieved.

Sweden

The list of ethical mutual funds domiciled in Sweden was retrieved from the Swedish Morningstar webpage. Morningstar rates mutual funds on the basis of their holdings in companies that are environmentally, socially, and governance-conscious. Morningstar screen all consisting mutual funds on the Swedish market, the mutual funds which are classified as ethical are then sorted into a certain Morningstar category called “ethical funds”. The initial list of Swedish ethical funds consisted of 91 funds. In the next step of our screening process, the funds in the list that were not classified as an equity fund were excluded.

Norway

The list of Norwegian ethical funds was identified through Skandiabanken. Skandiabanken continuously evaluate mutual funds and publish a list of funds classified as ethical. The ethical funds were than further evaluated through Morningstar’s sustainability ranking and an initial list of funds were constructed.

Denmark

The Danish SRI fund market is not as developed as the other markets in the Scandinavian area.

The identification of ethical mutual funds was made through an extensive research. Morningstar’s fund database, reports and articles were examined in order to detect the ethical mutual funds on the Danish market. A list of mutual funds, which bear labels such as ethical, socially responsible, environmental and ecology, was set up after a screening of the funds in the Morningstar database.

The funds were then further examined through the fund’s homepage. Funds that did not meet the criterion of being equity funds, such as balanced and money market funds were excluded.

Additionally, for 5 funds data was not available in either Datastream or Bloomberg. Only 6 funds

are identified as ethical equity mutual funds with domicile in Denmark, despite a thoroughly review of the market.

The complete final list of all funds included in the study could be found in Appendix A.

6.3.2. Conventional funds

Bauer et al. studied the ethical mutual fund performance and investment style in 2005. Their study examined the performance and investment style of ethical mutual funds domiciled in US, UK and Germany. Bauer et al.’s article discusses the difficulty regarding the likelihood of the ethical fund holdings being different from those of conventional mutual funds, since ethical mutual funds invest subject to ethical constraints. The authors assumed that ethical equity indices could be more powerful in explaining variation in ethical mutual fund return compared to conventional equity indices. However, Bauer et al. tested for this in their study and the test showed that conventional benchmarks have a higher explanatory power of SRI fund returns, in comparison to SRI benchmarks. Several similar studies have also found that the returns of SRI funds are better explained by conventional indices than by SRI indices (Bauer, Derwall, & Otten, 2007; Cortez, Silva, & Areal, 2009; Cortez, Silva, & Areal, 2012; Leite & Cortez, 2014) .

The previous results indicate that conventional benchmarks are superior to SRI benchmarks when evaluating ethical mutual fund performance. (Mallin, Saadouni, & Briston, 1995) Mallin et al.

(1995) introduced a new type of benchmark for performance measurement. The performance of ethical mutual funds was compared to the performance of their conventional counterparts through the matched pair approach. The ethical mutual funds were matched to conventional funds on the basis of fund size and the date the fund was formed. (Chegut, Schenk, & Scholtens, 2011) reviewed the SRI mutual fund performance literature in order to provide best practice within the field. The study made content and meta-ethnographic analysis on 41 studies, which covered mutual funds in 21 different countries. Their findings showed that researchers appear to measure the performance of SRI funds against three different categories of benchmarks; conventional indices, matched pair analysis and sustainability indices. The matched pair approach was used as the main benchmark in the early studies of SRI mutual fund performance and is still frequently used today. The authors emphasized the importance of matching SRI mutual funds against conventional mutual funds from the same geographical area. This was based on the discovery of Schröder (2004) among others, which had found that the specific SRI policies had shown to be culturally motivated. Chegut et al. (2011) found that the best practice in SRI mutual fund performance for utilizing a matched pair analysis with SRI funds according to this study is to

consider conventional mutual funds that are of comparable age, size, sector, culture and asset diversification.

However, more recent studies have shown that size does not seem to have a significant influence on SRI fund performance (e.g., Gregory et al., 1997; Kreander et al., 2005; Girard et al., 2007;

Renneboog et al., 2008.)

Consequently, the fund size will not be considered in our study, since previous studies have claimed the irrelevance of the size of the fund when measuring financial performance.

Kreander et al. (2005) extended the framework of Mallin et al., (1995) by taking the investment universe of the funds into consideration in the matching pair approach. The investment universe was also selected as a criterion in a more recent study by Leite & Cortez, (2014). A matched pair analysis was made in order to compare performance of conventional mutual funds to ethical mutual funds. The sample of conventional mutual funds was selected on basis of age, country of origin, investment universe and Morningstar category. Morningstar has classified funds into categories according to the investment style of the fund. The classification is made on the basis on the portfolio statistics and composition over the past three years. The purpose of this classification is to simplify the comparison between funds (Morningstar, 2016).

The selection of the conventional funds included in our reference group is based on the matching criteria of (Leite & Cortez, 2014) . The criteria are fund age, domicile country, investment universe (Global, Scandinavia or US) and investment style, which correspond to the Morningstar category of the ethical counterpart.

All conventional funds available to investors in each country within each investment category are identified using regional Morningstar websites. The legal domicile country, inception date, ISIN code and investment universe are collected for each ethical mutual fund. In the next step of the procedure, the ethical funds are matched to conventional funds based on those criteria. The inception date of the conventional fund has to be within 12 months of the inception date of the ethical mutual fund with which it is matched.

Each ethical fund is matched with one conventional, as far as possible, in line with the matching criteria. Previous studies have developed a matched sample containing one, two or three appropriate conventional funds to every ethical fund. There is a possibility of a larger sample,

containing two or three conventional funds for each ethical fund, when there are only one or two matching criteria.

This study compares the performance only to one conventional fund, due to a limited number of funds available at the Scandinavian markets, which match with the ethical fund on all criteria.

Bauer et al. (2005) constructed one portfolio of ethical mutual funds and one portfolio of the matched conventional funds. The returns were then computed based on an equally weighted portfolio of the funds included in each portfolio. The performance of each portfolio was then compared. This study will replicate the method of Bauer et al. (2005). Furthermore, the analysis at the portfolio level is complemented with an analysis at the individual fund level, where the difference in performance of each individual set of funds is examined, in line with the method of Leite & Cortez, (2014).