Conflicting Objectives Between ESG Funds and Their Investors: Evidence From Mutual Fund Voting Records

Abstract

We examine whether ESG funds trade-off greater short-term financial performance against the long-term sustainability of portfolio firms. Studying voting records, we find that ESG funds vote against their stated pro-social mandate, with this pattern persistent in within-institution, across-institution, and close-vote tests. We mitigate concerns about proposal quality, firm quality, and the flow sensitivity of investors. Simulating a correction to this pattern suggests an increase in the passage of environmental and social proposals and greater sustainability disclosures. Although investors delegate their sustainable preferences through funds, the conflicting objectives between ESG funds and their investors can impede improvements in the corporate sustainability of portfolio firms.

Keywords: Mutual Funds, Voting, Corporate Governance, Socially Responsible Investment, Corporate Social Responsibility, Environmental Social and Governance

JEL Classification: G23, G34, M14