Bias in ESG Funds

Abstract

Bias is very closely linked to the issue of performance persistence. The direction of the bias is not clear even for traditional mutual funds. This paper documents the bias in performance data for all funds with a sustainability mandate in Morningstar® database. The performance of complete portfolio, surviving portfolio, disappeared funds, and new funds is studied. Mutual funds presumably change their mandate to be or not to be part of intentional sustainability mandate for two different reasons; lack of investment choice if they a have a sustainability mandate or to attract more investors by signaling their sustainability mandate. Two kinds of biases act in opposite direction. The overall direction of the bias depends on the relative magnitude of these two biases.

Keywords: Bias, Survivorship Bias, Sustainability, SRI, ESG, Socially-Conscious Mandate, Mutual Funds