Environmental disclosures and ESG fund ownership

Abstract

In this study, we examine whether environmental, social, and governance (ESG) funds' investment decisions are sensitive to the existence and extent of firms' voluntary environmental disclosures. We create our measures of voluntary environmental disclosure using bigrams extracted from the Global Reporting Initiative standards. We provide robust evidence that voluntary environmental disclosure in conference calls is associated with greater ESG fund ownership in the subsequent period, incremental to firms' ESG ratings. We also provide evidence that fund managers' reliance on environmental disclosure is concentrated in water, waste, emissions, and compliance disclosures. ESG fund ownership increases with environmental disclosure that is more positive and specific. Our primary finding persists both when we rely on the sustainability report as an alternative proxy for environmental disclosure and when we use fund-level tests. Overall, our evidence is consistent with ESG funds relying on firms' disclosures when making investing decisions and inconsistent with recent regulatory concerns that ESG fund managers are not following through on their stated investing strategies.