Active Fund Management when ESG Matters: An Equilibrium Perspective

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: 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