Do ESG Funds Make Stakeholder-Friendly Investments?

Review of Accounting Studies, forthcoming

54 Pages Posted: 19 Apr 2021 Last revised: 31 May 2022

See all articles by Aneesh Raghunandan

Aneesh Raghunandan

Yale School of Management

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Date Written: May 27, 2022

Abstract

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds (as identified by Morningstar) in the United States from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores. We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.

Keywords: social responsibility, ESG, SEC, environmental and labor laws, mutual fund, Violation Tracker

JEL Classification: M14, G23, G34, M41

Suggested Citation

Raghunandan, Aneesh and Rajgopal, Shivaram, Do ESG Funds Make Stakeholder-Friendly Investments? (May 27, 2022). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3826357 or http://dx.doi.org/10.2139/ssrn.3826357

Aneesh Raghunandan (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

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