Do ESG Funds Deliver? Evidence from Japanese Equity Mutual Funds

This study investigates the performance and structural characteristics of ESG funds in Japan's mutual fund market over the period 2015-2023.Using detailed securities holdings data, we classify 818 equity mutual funds into three groups-Active, Passive, and ESG-based on investment style and ESG orientation.We evaluate fund-level attributes including CSP and ESG scores, asset size, industry concentration (HHI), excess returns, realized volatility, alpha under the Fama-French sixfactor model, idiosyncratic volatility, and expense ratios.Our findings reveal that while ESG funds exhibit higher CSP and ESG scores than non-ESG active funds, they do not outperform passive funds in terms of sustainability metrics.Moreover, ESG funds underperform in realized returns and alpha, while incurring higher expense ratios.These results persist even after controlling for fund style and disclosure timing via propensity score matching.Contrary to popular belief, the notion that ESG funds deliver superior long-term returns may be more myth than reality.The evidence suggests that investors in ESG funds face a dual disadvantage: lower performance and higher costs.