Discretionary Information in ESG Investing: A Text Analysis of Mutual Fund Prospectuses
50 Pages Posted: 4 May 2022
Date Written: April 12, 2022
We construct novel measures of funds' environmental, social, and governance (ESG) commitment by applying text analysis to the discretionary investment-strategy descriptions in their prospectuses. We find that investors respond strongly to text-based ESG measures. Using discrepancies between text- and fundamentals-based ESG measures, we identify greenwashing funds. We find greenwashing is more prevalent in the last five years and among funds with lower past flows and weaker oversight. Furthermore, greenwashing funds attract similar flows as funds that truthfully reveal their ESG commitment, suggesting that investors cannot distinguish between them. On the other hand, greenwashers have inferior performance than genuinely green funds.
Keywords: ESG, Prospectus, Greenwashing, Text Analysis, Mutual Funds, Fund Flows, Fund Performance
JEL Classification: G11, G23
Suggested Citation: Suggested Citation