How Committed to ESG Are Asset Managers Really?

The researchers used datasets from MSCI, Sustainalytics and TruValue Labs to determine whether signatory asset managers changed their portfolio holdings to incorporate ESG factors. Their analysis found that managers' ESG scores were the same after they signed as they were before, regardless of the dataset used.

What about returns? Kim and Yoon found no increase. "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)."

The researchers also examined signatory funds' proxy voting behavior, and found that they were 30% more likely than their peers to remain silent on environmental issues and that their stock holdings subsequently experienced an increase in environment-related controversies.

"We find this interesting because environmental controversies have been documented to be tail risks that have significant negative implications to stock prices," they write.

Kim and Yoon's research showed that smaller, newer funds with higher historical alpha were likelier to sign PRI, but that only quant-driven and institution-only funds improved ESG after signing.

"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 write that their findings suggest asset managers need to clearly communicate their ESG execution or execute on ESG strategies as promised. "This is crucial because tremendous amount of wealth and resources are flowing into ESG."