Seeking Green? Mutual Fund Investment in ESG Stocks

Abstract

This paper examines how equity mutual fund managers make decisions on investing in ESG stocks. Using investor flows to proxy for fund managers' pecuniary incentive, we show that mutual funds with flows highly sensitive to performance invest less in ESG stocks, while funds with flows positively sensitive to ESG score invest more in ESG stocks. Moreover, based on hand-collected data of manager compensation, we find that fund managers whose compensations are explicitly linked to fund performance invest less in ESG stocks. These findings suggest that pecuniary concerns play a significant role in mutual funds' investment in ESG stocks.

Keywords: mutual funds, ESG investment, manager compensation, fund performance

JEL Classification: G10, G11, G23