N°22-98: Revealed Beliefs about Responsible Investing: Evidence from Mutual Fund Managers

What do asset managers -- a group of presumably sophisticated investors -- believe regarding the financial performance of Environmental, Social, and Governance (ESG) investment strategies? We address this question by exploring the relationship between US mutual fund managers' incentives to deliver high returns and their portfolio ESG performance. Mutual funds with managerial ownership ("skin in the game") exhibit significantly lower ESG performance than otherwise similar funds. Co-investing managers are less likely to buy high-ESG stocks after exogenous shocks in the flow incentives to hold such assets. Moreover, the negative effect of managerial ownership on portfolio sustainability is stronger for managers paid to maximize assets under management and weaker for managers paid to maximize returns. Overall, the results are contrary to what one would expect if fund managers, on average, considered ESG selection an enhanced form of portfolio management to maximize risk-adjusted returns.