Do policy uncertainty and ESG sentiment drive ESG commitment of green funds?

In this study, we examine the effect of economic policy uncertainty (EPU) and environmental, social and governance (ESG) sentiment on the motivation of green funds (GFs) to pursue ESG objectives. We use data on US mutual funds that market themselves as having socially responsible investment (SRI) mandates (hereafter green funds) and find that managers increase their ESG practices in the subsequent year when EPU or investor’s attention to ESG issue rise. Interestingly, this pattern remains unchanged during crisis period (Covid-19 pandemic), although the marginal effect is much more lower. Our results show also that higher performance (alphas) decreases the ESG commitment of green funds in the subsequent year. Our findings suggest that policy uncertainty and ESG sentiment affect the motivations of green funds to pursue ESG objectives.