Working Paper: CEPR ID: DP18270
Authors: Gianpaolo Parise; Mirco Rubin
Abstract: We uncover evidence of widespread sustainability ratings manipulation by mutual funds. Our analysis finds that ESG fund portfolios exhibit 31% higher ESG exposure immediately before mandatory portfolio disclosure than immediately afterwards. As a result, disclosed portfolios receive substantially higher ratings than actual portfolios would.We document that ESG manipulators earn higher risk-adjusted returns and attract more investor flows. At the asset level, we find that high-ESG (low-ESG) stocks rise (fall) in the days before fund portfolio disclosure and revert afterwards. We discuss whether ESG manipulation is optimal for investors and document similar behavior by non-ESG funds, albeit more limited.
Keywords: window dressing; mutual funds; ESG; green finance; asset allocation
JEL Codes: G11; G23; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mandatory portfolio disclosure (G11) | Decrease in ESG exposure (F64) |
| Decrease in ESG exposure (F64) | Increase in market portfolio exposure (G19) |
| Green window dressing (L68) | Higher risk-adjusted returns (G11) |
| Higher risk-adjusted returns (G11) | Increased investor flows (F21) |
| Mandatory portfolio disclosure (G11) | Higher risk-adjusted returns (G11) |
| Mandatory portfolio disclosure (G11) | Shift in ESG beta (C46) |