Contradictory Voting by ESG Funds

Abstract

This paper studies the conflict between ESG funds and their investors. Funds trade-off greater short-term financial performance against long-term sustainability. This conflict results in ESG funds voting against their stated pro-social mandate, even when supported by proxy advisors. Lower returns to sustainable proposals result in funds actively managing returns, while flow tests suggest that investors do not respond to contradictory voting. Simulating a correction to this voting pattern suggests an increase in passage of proposals, and greater sustainability disclosures. While investors delegate their pro-social preferences onto socially responsible funds, financial returns ultimately determine a funds' stance towards such issues.

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

JEL Classification: G23, G34, M14