Responsible Investment Funds and Their Management Companies’ Emphasis on ESG Performance: First Priority or Icing on the Cake?

Abstract

We investigate the potential impact of Fund Management Companies’ (FMCs) responsible investment exposure on their responsible investment funds’ ESG performance. Using a comprehensive dataset of US domestic equity Responsible Investment Funds (RIFs) over the period 2005 to 2020, we find that improvements in fund-level ESG scores is treated as the “icing on the cake” and is promptly sacrificed if the fund suffers outflows. We also find that RIFs managed by FMCs with either the lowest (≤20%) or the highest (>80%) ESG exposure levels are more likely to put extra effort toward enhancing funds’ ESG scores. Additionally, we observe that investors who choose FMCs with the highest ESG exposure level are less sensitive to financial returns when considering ESG performance. Our results provide additional evidence that investors need to select FMCs carefully, especially when ESG performance is their primary consideration.

Keywords: Responsible investment funds, Fund management company, ESG scores, fund flows