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Active fund management when ESG matters

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  • Avramov, Doron
  • Cheng, Si
  • Tarelli, Andrea

Abstract

This paper develops and tests an equilibrium model of active fund management with ESG considerations. Heterogeneous sustainability preferences lead fund managers to intensify information acquisition on assets across the ESG spectrum, broadening the scope of active management. This information channel enhances price informativeness, lowers discount rates, and increases portfolio deviation from benchmarks. The model predicts a negative and concave ESG-expected return relation, stronger for green assets and weaker for brown assets. Using data on U.S. mutual funds and stocks from 2007–2021, we find supporting evidence based on price informativeness and the implied cost of equity capital.

Suggested Citation

  • Avramov, Doron & Cheng, Si & Tarelli, Andrea, 2026. "Active fund management when ESG matters," Journal of Banking & Finance, Elsevier, vol. 182(C).
    • Handle: RePEc:eee:jbfina:v:182:y:2026:i:c:s0378426625002171
    DOI: 10.1016/j.jbankfin.2025.107597
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    Cited by:

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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
    • 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
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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