The complex materiality of proprietary ESG information: Evidence from actively managed funds

78 Pages Posted: 25 Jan 2023 Last revised: 27 Mar 2024

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame; ECGI

Timothy B. Riley

University of Arkansas - Department of Finance

Rafael Zambrana

University of Notre Dame - Mendoza College of Business

Date Written: March 24, 2024

Abstract

We introduce Active ESG, a novel metric of how actively fund managers use proprietary ESG information that differs from third-party ESG ratings. Active ESG positively predicts future fund performance, but only among ESG funds, which we attribute to the value of specialization. The predictability strengthens when managers focus more on stocks with greater ESG rating uncertainty, suggesting such uncertainty creates active management opportunities. ESG funds with high Active ESG anticipate corporate misconduct and profit from trading ahead of third-party ESG rating downgrades. Our results indicate that ESG information is material, but complex, underscoring the importance of proprietary information and specialization.

Keywords: Mutual fund, ESG, Environmental, Social, Governance, Active, Alpha, Disagreement, Benchmark, Performance, Corporate Misconduct, Rating Downgrades

Suggested Citation

Cremers, K. J. Martijn and Riley, Timothy Brandon and Zambrana, Rafael, The complex materiality of proprietary ESG information: Evidence from actively managed funds (March 24, 2024). Available at SSRN: https://ssrn.com/abstract=4335688 or http://dx.doi.org/10.2139/ssrn.4335688

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

Rafael Zambrana

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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