Working Papers

This paper documents that ESG funds in the U.S. charge net expense ratios that are 8.8 to 12.8 basis points lower than those of conventional funds. This fee difference is driven by waivers, which are larger and more frequent for ESG funds. Based on a model of horizontal differentiation, we provide evidence consistent with three explanations: (1) ESG funds are in a highly competitive market segment, (2) ESG funds exhibit lower expected returns, and (3) fund providers use ESG funds with low fees to cross-sell higher-fee funds.

We report results from a pre-registered field experiment about the impact of index provider engagement on corporate climate policy. A randomly chosen group of 300 out of 1227 international companies received a letter from an index provider, encouraging the company to commit to setting a science-based climate target to remain included in its climate transition benchmark indices. After one year, we observed a significant effect: 21.0% of treated companies have committed, vs. 15.7% in the control group. This suggests that engagement by financial institutions can affect corporate policies when a feasible request is combined with a credible threat of exit. 

A fundamental concern about green investing is that it may crowd out political support for public policy addressing negative externalities. We examine this concern in a preregistered experiment shortly before a real referendum on a climate law with a representative sample of the Swiss population (N = 2,051). We find that the opportunity to invest in a climate friendly fund does not reduce individuals’ support for climate regulation, measured as political donations and voting intentions. The results hold for participants who actively choose green investing. We conclude that the effect of green investing on political behavior is limited. 

Existing measures of ESG (environmental, social, and governance) performance -- ESG ratings -- are noisy and, therefore, standard regression estimates of the effect of ESG performance on stock returns are biased. Addressing this as a classical errors-in-variables problem, we develop a noise-correction procedure in which we instrument ESG ratings with ratings of other ESG rating agencies. With this procedure, the median increase in the regression coefficients is a factor of 2.1. The results are similar when we use accounting profitability measures as outcome variables. In simulations, our noise-correction procedure outperforms alternative approaches such as simple averages or principal component analysis.