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Why do mutual funds hold ESG? Evidence from China

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  • Zhang, Ping
  • Wang, Zixi
  • Sha, Yezhou

Abstract

We investigate the motivations of mutual funds for holding ESG stocks in China. We find that funds strategically invest in high-ESG stocks to cater to investor preferences, with a one-standard-deviation increase in ESG holdings resulting in approximately 9% higher fund inflows. Fund managers also exhibit intrinsic ESG preference, especially when their ownership stakes are higher. Specifically, fund managers strategically use ESG investments to perform risk-shifting, enhancing portfolio stability during downturns, and actively ride ESG stock bubbles to capture superior returns. Moreover, fund managers proactively integrate ESG considerations into their investment decisions by selecting stocks with higher ESG ratings and increasing their portfolio weights. Our findings highlight the strategic roles ESG plays in attracting investor capital and serving managerial incentives to optimize returns and manage portfolio risk for mutual funds.

Suggested Citation

  • Zhang, Ping & Wang, Zixi & Sha, Yezhou, 2026. "Why do mutual funds hold ESG? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:pacfin:v:97:y:2026:i:c:s0927538x26000569
    DOI: 10.1016/j.pacfin.2026.103110
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