Abstract:

Our study employs a novel machine-learning approach to uncover the underlying motivations driving U.S. mutual funds' sustainable investment strategies. The identified motivations include financial value, alignment with moral values, and impact. While alignment with moral values is implemented via ex ante exclusion, impact is implemented via active investment and engagement, and thus they appeal to different nonpecuniary preferences.

We find that 1,500 mutual funds pursue sustainable investment goals and manage $1.4T or 6% of the total AUM as of 2023, compared to 269 funds managing $0.3T or 3% in 2014. Among the ML-identified sustainable funds, financial funds are the most common, and impact funds are the rarest. The ratio of (Financial | Moral | Impact) sustainable funds is about (70:20:10), or approximately ($1T | $300B | $140B), respectively, in 2023. Thus, capital allocated to generate positive impact on the environment and society (“impact capital”) is only 0.6% of total MF AUM ($25.5T).

We find that the majority of funds labeled as “sustainable” prioritize enhancing financial value or alignment with values over generating impact. Notably, our method reveals the prevalence of hybrid funds, blending financial “value” and moral “values” objectives. Impact-driven funds, though least prevalent, exhibit distinctive management practices, holding companies with more room for improvement and supporting social and environmental shareholder proposals. These findings illuminate the need for clear labels to differentiate between “doing well” (value), “being good” (values) and “doing good” (impact). By clarifying fund managers’ motivation, such labels could enhance investor welfare by improving matching between mangers’ and end investors’ motivation for sustainable investing. Understanding the heterogeneous motivations of sustainable investors and the potential tension among them can in turn inform policy decisions, investment practices, and corporate behavior.

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to finsec-abs@uva.nl if your are interested in attending this seminar.