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The sustainability trap: Active fund managers between ESG investing and fund overpricing

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  • Bofinger, Yannik
  • Heyden, Kim J.
  • Rock, Björn
  • Bannier, Christina E.

Abstract

This study examines the relation between a fund’s environmental, social and governance (ESG) rating and active fund investment skill. We find that higher ESG ratings are associated not only with higher overpricing in the fund. Rather, higher sustainability of the fund also leads to higher overpricing in the fund even relative to its benchmark. Pursuing higher fund sustainability hence leads to active fund overpricing which is typically interpreted as low investment skill.

Suggested Citation

  • Bofinger, Yannik & Heyden, Kim J. & Rock, Björn & Bannier, Christina E., 2022. "The sustainability trap: Active fund managers between ESG investing and fund overpricing," Finance Research Letters, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:finlet:v:45:y:2022:i:c:s1544612321002397
    DOI: 10.1016/j.frl.2021.102160
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    Cited by:

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    2. Du, Linda Y.L. & Sun, Jianfei, 2023. "Washing away their stigma? The ESG of “Sin” firms," Finance Research Letters, Elsevier, vol. 55(PB).
    3. Klinkowska, Olga & Zhao, Yuan, 2023. "Fund flows and performance: New evidence from retail and institutional SRI mutual funds," International Review of Financial Analysis, Elsevier, vol. 87(C).
    4. Berenike Wiener & Georg von Schnurbein, 2023. "Foundation Investment Funds for Grant-Making Foundations in Germany: Do They Facilitate Sustainable Investing?," SAGE Open, , vol. 13(4), pages 21582440231, December.

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    More about this item

    Keywords

    ESG; Sustainability; Mutual funds; Mispricing; Active fund overpricing; Fund investment skill;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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