Discretionary Information in ESG Investing: A Text Analysis of Mutual Fund Prospectuses
62 Pages Posted: 4 May 2022 Last revised: 3 Nov 2023
Date Written: April 12, 2022
Abstract
We construct novel measures of mutual funds’ environmental, social, and governance (ESG) commitment by analyzing the discretionary investment-strategy descriptions of their prospectuses. We find that fund flows respond strongly to text-based ESG measures. Using discrepancies between text- and fundamentals-based ESG measures, we identify greenwashing funds. We find that greenwashing is more prevalent since 2016 (coinciding with the Paris Agreement) and among funds with lower past flows and higher expense ratios, and isn't associated with superior subsequent performance. Furthermore, greenwashers attract similar flows to genuinely green funds, suggesting that investors cannot distinguish them. Our results could help regulators' efforts to combat ESG-related misconduct.
Keywords: ESG, Prospectus, Greenwashing, Text Analysis, Mutual Funds, Fund Flows, Fund Performance
JEL Classification: G11, G23
Suggested Citation: Suggested Citation