How much weight does an ESG commitment carry?

Asset managers that sign on to responsible-investing pledge show no signs of doing better after, says study

How much weight does an ESG commitment carry?

Those in the know about ESG are aware of greenwashing, where non-green funds are re-labelled as sustainable in order to attract the interest of environmentally minded investors. With a new study, fresh questions are being raised about whether managers that make a major responsible-investing commitment actually do better after they sign on.

The commitment in question is becoming a signatory to the United Nations Principles for Responsible Investment (UNPRI), which entails committing to incorporating ESG issues into investment analyses and decision-making processes.

As reported by ThinkAdvisor, a study by Soohun Kim from Georgia Institute of Technology and Aaron Yoon at Northwestern University found asset managers that sign on to the UNPRI experience a large fund inflow after they declare their commitment. Their analysis found that it amounts to 4.3% per quarter over the six quarters after they sign, compared to the six months previous.

That increase in fund flow, they noted, occurs regardless of a fund’s prior ESG performance.

But using MSCI, Sustainalytics, and TruValue Labs data, the researchers determined that the asset managers’ ESG scores remained the same even after they signed, indicating that they did not change their portfolio ESG holdings to incorporate ESG factors.

“We actually find that both return and alpha substantially decrease after signing and that this result is robust to controlling for fund size (i.e., diseconomies of scale),” Kim and Yoon added.

Findings on proxy voting behaviour, another important measure by which ESG investors assess fund managers’ commitment to principled investing, were similarly discouraging. The researchers found that compared to their peers, signatory funds were 30% more likely to not speak up on environmental issues. Even more, their stock holdings were found to subsequently undergo an increase in environment-related controversies.

Digging into different types of funds, Kim and Yoon found that smaller, newer funds with higher historical alpha were more likely to sign PRI. But after signing, only quant-driven and institution-only funds seemed to show improved ESG performance.

“Overall, our conclusion is that only select signatories make visible changes to ESG while most are using PRI as a mechanism to attract capital,” the researchers said, suggesting that asset managers should either be clear about their ESG execution or implement their ESG strategies as promised.


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