A recent study by an international team of academics examines whether renaming investment funds to include the term ‘ESG’ is just a cosmetic jump on the sustainability bandwagon – or whether it does have a positive impact in reducing ESG risk and improving ESG performance. Here, we summarise their findings.
This article is part of our series on current academic research into a range of sustainability-related investment topics. The papers discussed were presented at the latest annual conference of the Global Research Alliance for Sustainable Investment and Finance. We believe in science-led sustainable investment. Partnering with academic researchers can add value since thorough research helps us to grasp the scope of climate change and biodiversity loss, to quantify risk, and to develop fit-for-purpose solutions. This is why we sponsor GRASFI’s annual conference and share relevant scientific findings with investors, clients and the wider asset management industry on our websites.
Curious whether integrating environmental, social and governance (ESG) criteria in mutual fund investing was merely cosmetic, a team of academics from the Netherlands and the UK[1] has published a study – “Renaming with purpose: Investor response and fund manager behaviour after ESG fund renaming” – into the effectiveness of ‘what’s in a name’.
The research provides mixed evidence on whether fund flows increase after such renaming, although the effects appear greater for funds domiciled in Europe.
It documents that after ESG renaming, fund managers
- improve the ESG performance
- reduce exposure to controversial businesses
- decrease the carbon intensity
- lower the overall ESG risks of their portfolios.
Renaming has no material impact on funds’ expenses, according to the research.
Renaming – Not just for show
The results alleviate concerns that funds use ESG-oriented name changes cosmetically and imply that many asset managers are renaming with purpose.
Climate change and social sustainability issues such as gender or ethnic discrimination are now widely recognised problems within society and the investment industry. Not surprisingly, a growing body of studies[2] concludes that individuals and institutional investors prefer investments that consider ESG issues, and that fund managers increasingly deem ESG considerations part of their fiduciary duty.
There is evidence that mutual funds that cater to investors with ESG preferences might benefit from positive or more stable money flows and recent years have seen record inflows into funds that invest according to ESG criteria (source: Morningstar, 2023).
Accompanying this trend is the growing phenomenon of repurposing where existing investment funds re-brand and shift their stated investment profile into the ESG segment.
For example, some 250 European funds changed their name and investment policies to include sustainability-related terms in 2020, and this number doubled to 536 in 2021 (source: Morningstar, 2022).
However, whether funds’ actions mirror their new names is the subject of debate.
The new study investigates how investors respond to first-time ESG renaming by mutual funds around the world. It also looks at whether fund managers’ subsequent investments align with ESG repurposing, i.e., renaming with a concrete purpose.
It uses MSCI ESG Fund Metrics to identify 740 funds that changed their name by including an ESG term (‘Sustainable’, ‘Responsible’, ‘Social’, etc.) for the period July 2016 – October 2022.
The study employs a difference-in-differences regression approach to compare the changes in fund flows, ESG scores, turnover rates, and fees before and after the name change. This method helps isolate the effect of the name change by comparing funds that changed names with those that did not.
The authors also used two-way fixed-effect regressions, a related approach to control for fund-specific and time-fixed effects. From their analysis, they estimated that monthly flows increase, by one to two percentage points, even after controlling for fund size, past returns, fees and fund-level ESG scores. The effects are largely similar across retail and institutional share classes.
For European funds, the study found that monthly flows are higher (by around one percentage point) following renaming.
Adopting a greener profile
The study authors then looked into fund manager behaviour by analysis of fund-level ESG data, testing whether funds meaningfully change their ESG profile after renaming. They studied portfolio-level ESG scores from different providers of ESG data. Using scores from MSCI ESG Fund Metrics, they found evidence that ESG renaming leads to improvements in ESG performance.
Looking into fund-level metrics beyond aggregate ESG scores, they also examined scores that measure:
- Avoidance of controversial businesses
- Alignment with positive impact investments
- Decarbonisation.
They found that after ESG renaming, fund managers on average reduce both the exposure to controversial businesses and the carbon intensity of their portfolios.
In a nutshell, the majority of portfolio-level ESG metrics indicate that fund managers meaningfully change the ESG profile of their portfolio after changing their fund’s name.
Funds’ expenses were only marginally affected by mutual funds’ ESG-related renaming.
The results of this paper support the idea that renaming signals increased equity allocations subject to ESG criteria. They provide valuable insights to investors who are concerned about a fund’s ESG commitment implied by its name. Renaming is useful for fund managers to communicate those commitments.
These findings are in line with what we have observed over the past few years. There has been – and still is – appetite from investors, especially in Europe, for ESG products and sustainable investing. Names are the first link connecting investors with products. When they include ESG terms, they send a message about their level of ambition – and this should be reflected in the portfolio. At BNP Paribas Asset Management, we have implemented a naming policy that aligns fund names and portfolios on demanding criteria, often evidenced by adherence to recognised sustainability standards such as labels.
Pierre Moulin, Global Head of Products and Strategic Marketing
[1] Authors: Kayshani Gibbon (Utrecht University), Jeroen Derwall (Utrecht University/Maastricht University), Dirk Gerritsen (Utrecht University) and Kees Koedijk (Utrecht University/ CEPR)
[2] Hartzmark and Sussman, 2019; Bauer et al., 2021; Heeb et al., 2023
