The investment skill of ESG-aware mutual funds
Marco Ceccarelli, Richard Evans, Simon Glossner, Mikael Homanen, and Ellie Luu
[Draft available upon request]
This paper investigates financial returns to ESG integration by mutual fund families measured via a novel survey on responsible investing. Funds with the highest level of ESG integration have monthly risk-adjusted returns that are 4 basis points higher than comparable funds with lower levels of integration. Pedersen, Fitzgibbons, and Pomorski (2021) predict that ESG-aware fund managers who trade based on superior information should outperform ESG-motivated managers who trade based on taste. Consistent with this, not the socially conscious funds but the conventional ones outperform, when they are part of ESG-aware fund families. The findings are robust to controlling for portfolio exposure to an ESG factor and to time-unvarying fund and portfolio manager characteristics. We find that the higher returns are concentrated in mutual funds with the highest level of ESG integration that are also exposed to firms where having superior information is most valuable, i.e., those with high disagreement in ESG ratings and those that experience incidents. Specifically, only funds with the highest level of ESG integration that over-weight high ESG uncertainty stocks (against their respective investment benchmark) outperform. Taken together, the results showcase the superior investment skills of ESG-aware fund managers.
Mikael Homanen 