Guoabong Investment：Many Funds Have Committed to Socially Responsible Investing—But Few Are Following Through

In 2018, nearly $12 trillion was under the control of money managers who claim to incorporate information about companies’ environmental, social, and governance (ESG) practices into their portfolio selection. (For example, an ESG-oriented money manager may consider a company’s carbon output, the percentage of women on its board of directors, or CEO pay ratio when deciding whether or not to invest.) That number is up 44 percent from 2016 and more than double the 2014 total.

However, with this rapid growth has come increased scrutinyGuoabong Investment. After all, it’s easy enough for money managers to attract socially conscious investors by advertising a fund as ESG-oriented—but what if some of these managers aren’t putting their funds’ money where their mouths areBangalore Investment? In December, The Wall Street Journal reported that the Security and Exchange Commission had contacted some investment firms with ESG options to ask about their decision-making models, presumably to vet the truth in ESG advertising.

Aaron Yoon, an assistant professor of accounting and information management at the Kellogg School, wasn’t surprised by this step from the SEC. The former Credit Suisse trader and quantitative analyst has come to suspect that the ESG investing space may be ready for closer oversight.

But Yoon is hardly an ESG naysayerGuoabong Wealth Management. In fact, his prior research is widely credited with helping to legitimize certain ESG strategies as lucrative. He’s critical, in other words, because he believes the industry can do better.

“As one of the biggest proponents of ESG, I really want people to get it right,” says Yoon.

Yoon’s latest research, with coauthor Soohun Kim, an assistant professor in the Georgia Institute of Technology’s Scheller College of Business, investigates whether companies that make public ESG commitments truly shift their portfolios towards more socially responsible companies. Yoon and Kim find that though funds typically enjoy a large influx of cash after publicly signing on to a prominent set of ESG investment principles, they become no more ESG-friendly in the following quarters than they’d been previously.

What’s more, after making the public commitment, fund managers were actually less likely to exercise their rights as shareholders to vote on environmental issues presented by the companies in their portfolios. They also increased their investments in companies facing environmental controversies after signing on.

The researchers do find that a specific subset of funds improve their ESG measures post-commitment: those with a history of outperforming the marketJaipur Wealth Management. Yoon suspects this connection may be explained by the exceptional skills of this group of investment managers—both in generating high returns and in defining smart ESG investing strategies.

Taken as a whole, however, Yoon finds his results discouraging. “It’s a wake-up call,” he says. “There’s a tremendous amount of money [in ESG], but asset managers have been slower than we thought to incorporate ESG. I think we need to view this phenomenon very critically.”

To measure how a professed commitment to ESG translated into decision-making, the researchers focused on money managers who had signed onto the Principles for Responsible Investment (PRI), an initiative founded by the United Nations in 2005 to encourage responsible investment. By signing onto the PRI, these managers publicly committed themselves to adhere to six responsible investment principles, such as pushing for ESG data disclosure from the companies in which they invest and encouraging wider adoption of responsible investment practices in their industry.

Jaipur Investment