In Holdings We Trust: Uncovering the ESG Fund Lemons

Abstract

This paper explores potential greenwashing in the responsible investing (RI) landscape. We survey retail global equity funds in New Zealand, leading to a unique and novel dataset of fund manager RI priorities, practices and motivations, with a focus on respondents’ ‘flagship’ ESG funds. We show that RI approaches were mainly motivated by performance and fund flows, or value, rather than ethical values. Next, we analyse survey responses against the holdings data for the ‘flagship’ ESG funds and find, contrary to our hypothesis, portfolio carbon intensity was not significantly lower for members of climate initiatives, those that prioritised climate change or broader environmental themes or engaged in a decarbonisation strategy - with these results robust after controlling for ‘engagement’ strategies. The divergence between words and actions appears to be consistent with greenwashing funds (‘lemons’). We find further support for this conclusion when comparing ESG-named and non-ESG-named funds, for survey respondents and non-respondents.

Keywords: G11, G24, M14