Active Fund Management when ESG Matters
80 Pages Posted: 10 Aug 2022 Last revised: 5 Apr 2024
Date Written: August 5, 2022
Abstract
This paper develops and tests an equilibrium model for analyzing active fund management with ESG considerations. Sustainable investing incentivizes mutual fund managers to intensify information acquisition, expanding the scope of the active fund industry. Sustainability-guided information and trading decisions result in increasing portfolio deviation from benchmarks at the fund level, while they contribute to enhancing price informativeness and diminishing discount rates at the stock level. Collectively, the negative ESG-expected return relation amplifies for green assets but weakens for brown assets, as supported by evidence from the implied cost of equity capital.
Keywords: ESG, Information acquisition, Mutual funds, Asset pricing
JEL Classification: G11, G12, G23, M14, Q01
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