Paper Describes State of Market for ESG Funds
A University of Pennsylvania Law School study provides an empirical overview of ESG mutual funds and specifically targets the concerns articulated by the SEC and the DOL, including greenwashing, costs and performance. Among their findings, the authors report that ESG funds are largely delivering on their promise to invest differently from other funds. The study observed a universe of ESG funds, evaluated portfolio composition using data from four separate rating providers, then reviewed the asset-weighted average of the ESG scores of the funds’ portfolio companies. According to the paper, funds that identify themselves as ESG funds hold portfolios that represent a significant ESG tilt based on the author’s observations. With respect to proxy voting, the study documented clear differences between the voting behavior of ESG and non-ESG funds, finding that although ESG funds do not automatically support every shareholder proposal related to ESG, these funds do vote more independently of management compared to other funds when it comes to environmental and social issues. The study also reviewed costs and expenses and returns of ESG funds. The authors report that, contrary to the concern articulated by the DOL, “we find no evidence that ESG funds cost more than comparable non-ESG funds, or that they offer inferior performance during our sample period (either raw or risk adjusted).” The paper also addressed the impact of variation in ESG ratings, noting that there are over 600 ESG rating providers and these providers rely on different sources of data and methodologies to analyze that data. The study incorporated ESG rating data from four providers — ISS, S&P, Sustainalytics, and TruValue Labs — to measure the ESG orientation of the funds reviewed and found that, although the providers take very different approaches to measuring ESG, the patterns observed were “remarkably stable” across providers.