Leighton, MarkYu, Fang2026-10-1320262026-10-132026Yu, Fang. 2026. Navigating the Green Frontier: Return Performance and Relative Fund Size Resilience of Paris Aligned Passive Equity ETFs. Masters Thesis, Harvard University Division of Continuing Education.32905791https://dash.harvard.edu/handle/1/42759944Our planet is approaching critical tipping points from accelerating climate change (IPCC, 2023). According to 2023 International Energy Agency (IEA)’s Net Zero Roadmap (2023), the required investment to put our world on track for net zero emissions by 2050 requires approximately USD 4.5 trillion annually by 2030. In response, ESG investing has grown rapidly as investors increasingly aim to align their portfolios with global climate goals (World Economic Forum, 2020). Yet, a fundamental debate persists: Can ESG investment strategies match the returns of conventional portfolios, or must investors sacrifice financial performance to achieve climate alignment? As trillions of dollars are concentrated in passive ETFs globally today, demonstrating that ESG or climate-aligned ETFs can deliver comparable, or even more resilient returns offers a powerful lever to redirect large-scale capital flows towards a low-carbon future without sacrificing financial performance. My research directly addressed this debate by evaluating the performance and investment implications of global passive equity ETFs aligned with the EU Paris-Aligned Benchmarks (PAB) over the period of January 2021 to May 2026. My primary research hypotheses were: 1) Climate-aligned PAB outperformed their conventional peers by 1% from calendar year perspective from 2021 to 2025; and 2) Given their systematic design, PAB ETFs demonstrated greater fund size resilience during market shocks. To test these hypotheses, I constructed a comprehensive global dataset of PAB equity ETFs launched since 2021. A pair matching methodology ensured robust analysis, pairing each climate-aligned ETF with an ETF tracking the parent conventional index. I evaluated portfolio performance using annual calendar year total return and I assessed the statistical significance of the paired return differentials using paired-samples t-tests and confirming the findings with Wilcoxon signed-rank tests. Across 166 matched ETF-year observations from 2021 through 2025, PAB ETFs underperformed by an average of approximately 2.72% per year, with the shortfall widening after 2021 and reaching its largest gap in 2025. Fund-size resilience, however, told a different story. During the earliest market shocks, such as the COVID recovery and green rally, the energy and inflation surge, and the interest-rate hike cycle, PAB ETFs retained and grew assets more strongly than their conventional peers, though this advantage faded as markets stabilized and reversed modestly during the later tariff and trade policy shocks. These findings carry concrete implications for multiple stakeholders. For investors and asset managers, the results show that climate alignment through PAB ETFs carried a measurable short-term return cost over the sample period, underscoring the need to communicate this trade-off transparently and to set realistic risk-return expectations. At the same time, the stronger fund-size resilience observed during several shock periods indicates that demand for climate-aligned funds remained durable even when relative returns lagged, suggesting that many investors weigh sustainability objectives, mandate consistency, and long-term transition positioning alongside fund performance. For index providers and issuers, the persistence of the return gap highlights the value of scrutinizing the sector tilts and implementation costs embedded in PAB benchmark construction.application/pdfenESG InvestingETFFund ResilienceParis AlignedPassive ETFSRI InvestingSustainabilityThesis or Dissertation2026-10-13