Work

Active fund management when ESG matters

Year: 2025

Type: article

Abstract: This paper develops and tests an equilibrium model of active fund management with ESG considerations. Heterogeneous sustainability preferences lead fund managers to intensify information acquisition on assets across the ESG spectrum, broadening the scope of active management. This information channel enhances price informativeness, lowers discount rates, and increases portfolio deviation from benchmarks. The model predicts a negative and concave ESG-expected return relation, stronger for green assets and weaker for brown assets. Using data on U.S. mutual funds and stocks from 2007-2021, we find supporting evidence based on price informativeness and the implied cost of equity capital.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2025.107597

Authors: Doron Avramov, Si Cheng, Andrea Tarelli

Institutions: Reichman University, Syracuse University, Università Cattolica del Sacro Cuore

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,340