ESG Skill of Mutual Fund Managers

56 Pages Posted: 20 Dec 2023 Last revised: 23 Apr 2024

See all articles by Marco Ceccarelli

Marco Ceccarelli

VU University Amsterdam

Richard B. Evans

University of Virginia - Darden School of Business

Simon Glossner

Board of Governors of the Federal Reserve System

Mikael Homanen

City University London - The Business School; PRI Association

Ellie Luu

University of Strathclyde

Date Written: December 7, 2023

Abstract

We propose a new measure of ESG-specific skill based on fund manager trades and ESG rating changes. We differentiate between proactive ESG managers, whose trades predict future changes in ESG ratings, reactive ESG managers, who change their portfolio allocation after a change in ESG ratings occurs, and non-ESG managers. The predictive ability of proactive managers is persistent in out-of-sample tests, consistent with manager skill. For identification, we rely on an exogenous methodology change of one ESG rating provider that redefined ESG ratings levels without releasing new information. Reactive managers significantly change their holdings in firms whose ESG ratings exogenously change, consistent with a lack of ESG skill. Proactive managers do not trade in the direction of the change, consistent with their trading no new ESG information. This ESG skill has economic implications: Investors in mutual funds with an explicit sustainability mandate reward proactive managers with 58bps higher average quarterly flows.

Keywords: ESG skill, mutual fund managers, investments, mutual funds

JEL Classification: F3, G0, G23

Suggested Citation

Ceccarelli, Marco and Evans, Richard B. and Glossner, Simon and Homanen, Mikael and Luu, Ellie, ESG Skill of Mutual Fund Managers (December 7, 2023). Darden Business School Working Paper, Available at SSRN: https://ssrn.com/abstract=4657038 or http://dx.doi.org/10.2139/ssrn.4657038

Marco Ceccarelli (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Simon Glossner

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mikael Homanen

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

PRI Association ( email )

25 Camperdown Street
London, E18DZ

Ellie Luu

University of Strathclyde ( email )

16 Richmond Street
Glasgow 1XQ, Scotland G1 1XQ
United Kingdom

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