Active Fund Management when ESG Matters

80 Pages Posted: 10 Aug 2022 Last revised: 5 Apr 2024

See all articles by Doron Avramov

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah

Si Cheng

Syracuse University - Department of Finance

Andrea Tarelli

Catholic University of Milan

Date Written: August 5, 2022

Abstract

This paper develops and tests an equilibrium model for analyzing active fund management with ESG considerations. Sustainable investing incentivizes mutual fund managers to intensify information acquisition, expanding the scope of the active fund industry. Sustainability-guided information and trading decisions result in increasing portfolio deviation from benchmarks at the fund level, while they contribute to enhancing price informativeness and diminishing discount rates at the stock level. Collectively, the negative ESG-expected return relation amplifies for green assets but weakens for brown assets, as supported by evidence from the implied cost of equity capital.

Keywords: ESG, Information acquisition, Mutual funds, Asset pricing

JEL Classification: G11, G12, G23, M14, Q01

Suggested Citation

Avramov, Doron and Cheng, Si and Tarelli, Andrea, Active Fund Management when ESG Matters (August 5, 2022). Available at SSRN: https://ssrn.com/abstract=4182602 or http://dx.doi.org/10.2139/ssrn.4182602

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

HOME PAGE: http://faculty.idc.ac.il/davramov/

Si Cheng

Syracuse University - Department of Finance ( email )

Whitman School of Management
721 University Avenue
Syracuse, NY 13244
United States

HOME PAGE: http://si-cheng.net/

Andrea Tarelli (Contact Author)

Catholic University of Milan ( email )

Largo Gemelli, 1
Milan, 20123
Italy

HOME PAGE: http://sites.google.com/view/andreatarelli

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