Firm-level ESG information and active fund management

Abstract

Using a novel dataset with daily firm-level ESG information, we examine whether and how active mutual fund managers integrate ESG information into their portfolio decisions. Our results show that managers actively trade on ESG information, leading to improved portfolio performance. This enhanced risk-adjusted return is attributed to the incorporation of ESG information into asset prices rather than to price pressure on green assets. Additionally, fund managers adjust their portfolios to cater to investor demand, especially during periods of heightened ESG awareness. Further, funds located in Democratic states and those with higher ESG ratings exhibit a stronger inclination towards ESG integration.