Active Fund Management when ESG Matters: An Equilibrium Perspective

78 Pages Posted: 10 Aug 2022 Last revised: 29 Jan 2023

See all articles by Doron Avramov

Doron Avramov

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 applies an information acquisition model to analyze active management when ESG matters. In equilibrium, sustainable investing leads mutual fund managers to acquire information when cross-asset ESG attributes and cross-fund ESG preferences are dispersed. Sustainability-based information decisions magnify fund heterogeneities in stock holdings and tracking errors, amplify the scope of active management, as well as reduce discount rates and improve price informativeness for underlying assets with sustainability profiles that depart from the average. Enforcing ESG-perceptive funds to adopt the optimal policies of ESG-indifferent funds leads to substantial utility losses, illustrating the economic significance of nonpecuniary motives.

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: An Equilibrium Perspective (August 5, 2022). Available at SSRN: https://ssrn.com/abstract=4182602 or http://dx.doi.org/10.2139/ssrn.4182602

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
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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