Mikael Homanen

ESG Skill of Mutual Fund Managers

with Marco Ceccarelli, Richard B. Evans, Simon Glossner, Mikael Homanen, and Ellie Luu

This paper proposes a new measure of ESG-specific skill based on the relationship between deliberate trading decisions of mutual fund managers and ESG rating changes. We differentiate between proactive managers, whose trades predict future changes in ESG ratings, and reactive managers, who change their portfolio allocation after a change in ESG ratings occurs. The predictive ability of proactive managers is persistent in out-of-sample tests, consistent with them being skilled. For identification, we rely on an exogenous methodology change of one ESG rating provider. The shock changed the level of ESG ratings without releasing new information. Reactive managers significantly change their holdings in firms whose ESG ratings exogenously change, consistent with them not having ESG skill. Proactive managers did not trade in the direction of the change, consistent with them trading on information. ESG skill has economic implications: Investors in mutual funds with an explicit sustainability mandate reward proactive managers with 70bp higher average monthly flows.

Link to this paper – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4657038