Mutual Fund Commitment to ESG

We examine the ESG commitment of active sustainable investment funds (SIF) by examining their stake change in response to ESG controversies of portfolio companies. We find that SIFs and conventional funds (CIFs) share identical portfolio rebalancing decisions after ESG controversies, both in terms of change in position size and length of time held. The result is robust to a) controversy events with different returns implications, and b) firms’ prior ESG performance difference. We also find that compared to CIFs, SIFs increase stake in firms with room for moving up on ESG performance ranking, but only if they were already “ESG-leaders”. Furthermore, both SIFs and CIFs appear to be reluctant to “exit” from firms with upcoming ESG performance ranking decrease. We also show evidence that SIFs fail to optimize portfolio weightings for firms overlooked by CIFs, resulting in underperformance by approximately 10 basis points.