Revealed Beliefs about Responsible Investing: Evidence from Mutual Fund Managers

Abstract

What do asset managers believe regarding the financial performance of Environmental, Social, and Governance (ESG) investment strategies? We address this question by exploring the relationship between fund managers’ co-ownership and portfolio ESG performance. Managers with more “skin in the game” exhibit significantly lower ESG performance in funds they manage than their peers. ESG performance is sensitive to changes in managerial ownership. Co-investing managers were less likely to increase their stake in high-ESG stocks after an exogenous shock in ESG-driven fund flows. Moreover, the negative effect of managerial ownership on ESG performance is stronger for managers paid to maximize assets under management, and weaker for managers paid exclusively to maximize financial returns. Overall, the results are contrary to what one would expect if managers really considered ESG strategies an enhanced form of portfolio management.