Greenwashing

Abstract

We find that a non-trivial number of hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) indulge in greenwashing. Hedge funds that greenwash underperform both genuinely green and nongreen funds after adjusting for risk. By exploiting the staggered adoption of stewardship codes, we provide causal evidence that relates greenwashing to fund underperformance. Consonant with an agency explanation, funds that greenwash (i) underperform more when incentive alignment is poor, (ii) trigger more regulatory violations, and (iii) report more suspicious returns. However, investors do not appear to discriminate between funds that greenwash and those that are genuinely green.

Keywords: Principles for Responsible Investment, Socially Responsible, Hedge Funds, Walk the Talk, Agency Problems, Operational Risk, ESG

JEL Classification: G23, Q56