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Greenwashing

As recently surveyed by Starks (2023) in her AFA Presidential Address, there is a large and growing literature extoling the nature and benefits of ESG investing. There is also an emerging literature examining activities that may be consistent with “greenwashing” or actual ESG activity that is inconsistent with stated ESG objectives. We can roughly segment the literature into potential greenwashing by funds, greenwashing by individual firms, and inconsistencies and even misreporting in ESG rankings.

Overview

ESG Funds and Greenwashing: Key Insights

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Mixed Impact Across Regions:​

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  • Gibson et al. (2022) found that European institutions signing the Principles for Responsible Investment (PRI) improved ESG scores, but U.S. institutions showed no improvement.

  • Kim and Yoon (2023) reported that U.S. mutual funds signing the PRI neither held higher ESG-rated portfolios nor improved scores post-signing, though they marketed their PRI affiliation heavily to attract inflows.​​​

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Greenwashing Practices:​

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  • Liang, Sun, and Teo (2022) showed hedge funds signing the PRI similarly advertise ESG but fail to reflect these commitments in their holdings or actions.

  • Raghunandan and Rajgopal (2023) observed that ESG funds often invest in firms with labor and environmental violations or high carbon emissions.

  • Andrikogiannopoulou et al. (2023) noted growing discrepancies between ESG fund marketing materials and actual holdings, contributing to increased fund flows despite misalignment.​​​​

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ESG Ratings and Shareholder Engagement

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Shareholder Voting Behavior:​

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  • Dikolli et al. (2022) found ESG funds are more likely to support ESG shareholder proposals.

  • Li et al. (2023), however, revealed ESG funds often vote against these proposals in close-call situations.

  • Atta-Darkua et al. (2023) highlighted that climate-conscious investors primarily adjust portfolio weights rather than directly engaging with management to curb emissions.​​

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Prevalence of Greenwashing:​

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  • Dumitrescu et al. (2023) found that 29% of U.S. funds marketed as ESG fail to invest in sustainable firms or vote for ESG initiatives more frequently than non-ESG funds.​​

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Broader Impacts and Conflicts of Interest

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Corporate Responses to Misconduct:​

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  • Ferrés and Marcet (2021) and Akey et al. (2024) documented firms improving corporate social responsibility (CSR) scores and increasing charitable donations post-misconduct to mitigate reputational damage.

  • Hong et al. (2019) noted high ESG ratings can lead to preferential government treatment.​​

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ESG Rating Biases:​

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  • Tang et al. (2022) identified conflicts of interest, with MSCI awarding higher ratings to firms with larger ownership stakes.

  • Li et al. (2023) reported more favorable ESG ratings for credit clients after ESG agencies were acquired by Moody’s or S&P, especially for clients with broader credit ratings.

  • Berg et al. (2021) found that a major ESG rating provider backdated scores to enhance correlations with future stock performance.

  • Cornaggia and Cornaggia (2023) observed firms adjusting to ESG rating model changes by targeting weighted criteria, often without reducing actual ESG risks.​


Overall, given the substantial amounts riding on ESG investments and ratings and the ambiguity of definitions and ratings, the market may be plagued with incentive issues similar to those in the credit rating agency literature, necessitating further forensic research to address these connections.

Relevant Papers

Do Responsible Investors Invest Responsibly?

Gibson Et Al. (2024)

Analyzing Active Fund Managers' Commitment to ESG: Evidence from the United Nations Principles for Responsible Investment

Kim and Yoon (2021)

Walk the Talk: ESG Mutual Fund Voting on Shareholder Proposals

Dikolli Et Al.(2022)

The Determinants of ESG Ratings: Rater Ownership Matters

Tang Et Al.

(2022)

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