Performance Evaluation of Conventional and Sustainable Pension Funds in Türkiye Before and During the COVID-19 Pandemic

Introduction

Some investors have purposes beyond increasing their financial returns and maximizing their total wealth. These investors, who are called socially responsible investors, attach great importance to the corporate policies of companies and expect their concerns on issues such as gender equality in employment, environmental protection, workplace safety, and human health to be eliminated (Goldreyer et al., 1999). Sustainable (ethic, socially responsible) investing is the process of considering social and ethical factors as well as economic criteria when making a decision to buy, sell or hold an investment instrument. In this framework, both positive and negative social screens are used when constructing sustainable investment portfolios. Firms with high corporate performance are included in these portfolios, while firms with weak social responsibility are excluded (Rivoli, 2003).

The existence of a positive relationship between the socially responsible behavior of companies and their financial returns will have positive effects on both sides of sustainable investments. In such a case, while companies tend to behave more socially responsible, investors will also be encouraged to make sustainable investments (Lozano et al., 2006). Although social, ethical, and environmental gains outweigh financial returns for socially responsible investors, these investors do not want to suffer from serious financial losses (Rivoli, 2003). It should be noted that, in addition to socially responsible investors, traditional investors may also include sustainable investments in their portfolios to reduce their risk. For them, the significance of financial losses is much higher than for socially responsible ones.

As sustainable investments have become more popular, various financial instruments have been developed in this field. One of these instruments is sustainable mutual funds. Sustainable funds are mainly based on investors' demands to include ethical, social, and environmental criteria in their investment processes (Bauer et al., 2005). These funds can be set up based on positive screens such as environmental responsibility, employee relations, and product reliability, or negative screens such as alcohol and tobacco products, gambling, and armament industry activities (Chang & Witte, 2010). Due to the rapidly gaining importance of sustainable investments, there has been a significant increase in the number of sustainable funds (Heinkel et al., 2001). In parallel with this increase occurred in the number of funds, the performance of sustainable funds has become the focus of research in the field. Performance evaluation studies generally focused on comparing the performance of sustainable funds to conventional funds (Yanık et al., 2010).

There are three hypotheses about the relative performance of sustainable and conventional investments. These are; investment portfolios have equal performances, the socially responsible investment portfolios have lower performances, and t the socially responsible investment portfolios have higher performances (Hamilton et al., 1993). The different results obtained by researchers indicate that each of these three hypotheses may be valid in different financial markets. Indeed, studies comparing the performance of sustainable investments with traditional investments reveal different results. The reasons for this difference in results may be occured due to the studies covering different periods and the comparison of the funds created according to various cultural values (Sandberg et al., 2009). Besides, the different methods used in performance calculations also have an impact on the differentiation of the results obtained (Jones et al., 2008). Early studies focusing on the performance of sustainable investments revealed that these investments underperform compared to conventional investments (Rosen et al., 1991). These findings do not contradict the structure of sustainable investments. This is because the sustainable investment philosophy, which is based on the negative screening method, leads to a narrowing of the investment universe. In this case, the risk of the portfolios naturally increases. In addition, companies that are oriented towards sustainability may sometimes face serious costs. Especially the environmental dimension of sustainability can expose companies to high conversion costs. For all these reasons, the low financial performance of sustainable funds in the early years was considered natural.