Research Paper Addresses Potential Greenwashing in Mutual Funds

Aalto University in Helsinki, Finland released a paper titled, “Greenwashing in Mutual Funds.” The paper details findings on labeling funds with an ESG designation as well as the prevalence and success of mutual fund families repurposing certain funds to enjoy the advantages of ESG designation. The paper examines several issues related to greenwashing and mutual fund self-designation of ESG funds. The study found that a self-designated ESG label helps mutual funds attract more flows than their non-ESG peers with otherwise similar characteristics, even if labeling the fund as ESG is in conflict with Morningstar’s objective Globe ratings. Second, the study found that within fund families, funds attracting below average flows are more likely to be repurposed as ESG funds. The authors note, however, the lack of evidence that the repurposing “improves flows or performance, at least in a short-term window after the repurposing event.” Last, the study demonstrates repurposed ESG funds do “reduce their equity industry exposure in ESG-unfriendly industries, especially in Oil and Gas related industries.”