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ESG ratings and ESG mutual fund management compensation

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  • Huang, Binghua
  • Li, Rui

Abstract

This study examines the influence of Environmental, Social, and Governance (ESG) ratings on the compensation of ESG mutual fund managers, while also considering the impact of ESG ratings on fund flows, within a continuous-time framework. We provide a closed-form solution for the present value of the management fee for ESG mutual fund managers. Our findings reveal that ESG fund managers with poor skills (low alpha levels) can earn higher compensation than those with high skills (high alpha levels) due to high ESG ratings. This result contrasts with the belief in the conventional fund industry that higher alpha levels should correspond to higher compensation for fund managers. Moreover, a lower fund liquidation boundary is positively correlated with higher fund manager value, as it reduces the risk of liquidation and extends the period for fee accumulation. The empirical analysis shows that, in China, ESG funds with high ESG ratings have higher average management fee than those with low ratings, despite lower returns, which corroborates our theoretical model’s predictions. Our research demonstrates that ESG ratings have become a core factor influencing fund managers’ incentives.

Suggested Citation

  • Huang, Binghua & Li, Rui, 2025. "ESG ratings and ESG mutual fund management compensation," Energy Economics, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:eneeco:v:147:y:2025:i:c:s0140988325003354
    DOI: 10.1016/j.eneco.2025.108511
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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