Is ESG mutual fund quality in the eye of the beholder? An experimental study of investor responses to ESG fund strategies

Abstract

ESG-profiled mutual funds (funds incorporating some form of Environmental, Social, or Governance-related concern) is an increasingly prominent part of the financial services industry. While this category of funds may look homogenous on the surface, the fact is that there is there is considerable variation in how funds choose to account for ESG concern in the investment portfolio. In this paper, we ask whether these strategic choices surrounding the implementation of ESG affect retail investors' perception of sustainable quality, financial quality, and/or perceived overall quality of the ESG-fund. Through two experiments (n = 261; n = 437), we find that choice of ESG-strategy (exclusion, inclusion, or engagement) impacts perceived mutual fund quality, with a marked preference for the inclusion strategy. Surprisingly, however, we find that the impact on overall fund quality is mediated by perceived financial quality, not perceived sustainable quality. In a similar fashion, we also find that implementing the strategy through in-house sustainability experts, as opposed to relying on external sustainability expertise, positively affect perceived quality, through perceived financial quality. In all, these results highlight that the manner in which ESG-factors are integrated in the investment portfolio can affect perceived quality of mutual funds, as investors consciously or unconsciously assign different financial expectations to the strategies.