Why Do Investment Companies Abandon Sustainability?

Abstract

This study examines an international sample of mutual fund companies that delisted themselves from United Nations-supported Principles for Responsible Investment (PRI) but continued to operate. I find that companies delist earlier when they do not realize their expected benefits in improving financial performance and portfolio sustainability scores, especially after being mandated to provide standardized sustainability disclosures. Companies also delist earlier when they have fewer internal resources and less external support for sustainable investment. Based on companies’ standardized sustainability disclosures, I find that companies are more likely to delist when they implement weaker management control systems. After delisting, companies allocate more assets towards sin industries and stocks with more ESG controversies. Collectively, these results reveal the non-negligible cost of public sustainability commitments. Therefore, only companies with internal resources and external environment to “do well by doing good” can afford to commit publicly to sustainable investment in the long term.

Keywords: sustainable investment, environmental, social and governance (ESG), Principles for Responsible Investment (PRI), institutional investors, mutual funds, mandatory disclosure regulation, sustainability disclosure standards, management control systems, real effects

JEL Classification: G15, G23, G30, M14, M40