Responsible Investment Funds (RIFs) are managed funds that consider Environmental, Social and Governance (ESG) objectives in their investment process. In 2022, it was estimated that approximately 12.6% of total US assets under professional management were classified as responsible (Forum for Sustainable and Responsible Investment [US SIF], 2022). With the growing popularity of RIFs, investors are increasingly seeking greater transparency regarding how responsibly their money is being invested (Amel-Zadeh & Serafeim, 2018). Academic scholars document a wide variety of responsible investing strategies that result in varying levels of responsible investing intensity and by extension, non-financial outcomes, which raise concerns about the authenticity of the RIF (Revelli, 2017). Furthermore, the US government oversight agency, the Securities and Exchange Commission (SEC) has noted potentially misleading marketing practices, known as greenwashing, within US funds and issued an alert to address these concerns (Chin, 2021). These lines of inquiry, in origin, are all related to a fundamental question, “Do RIFs invest in a responsible way?” My thesis aims to contribute to the literature in this field and examine the ESG performance of US domestic equity RIFs from various angles in three empirical studies.

In the first manuscript, I examine the existence of window dressing, a deceptive practice where managers manipulate portfolio holdings prior to a reporting date to mislead investors and the market. Using fund holdings information, I find that some RIFs alter their holdings towards higher ESG-score firms close to reporting dates. Such clustered end-of-quarter rebalancing is more likely to be window dressing than routine holding adjustments. Additionally, I also find that RIFs with poor past performance, higher tracking errors, or those managed by companies with less assets committed to sustainable investment are more likely to engage in ESG window dressing behaviours.

The second manuscript investigates the potential impact of Fund Management Companies (FMCs, also referred to as ‘fund families’) on funds’ ESG performance based on their ESG commitment level. I proxy the FMCs’ commitment level using their proportion of Assets Under Management (AUM) engaged in responsible investment, with the assumption that it represents the importance of responsible investment to an FMC’s overall benefit. The findings suggest that improvement of the fund’s ESG score is more like the ‘icing on the cake’ and will be sacrificed quickly if the fund suffers outflows. Furthermore, I find that funds managed by FMCs with either the lowest (≤20%) or the highest (>80%) ESG commitment levels are more likely to put extra effort into enhancing funds’ ESG scores. Additionally, I observe that investors who choose FMCs with the highest ESG commitment level tend to exhibit lower sensitivity to financial returns when controlling for ESG performance.

The final manuscript focuses on how a responsible investment fund manager’s past career path impacts their funds’ ESG performance. My results suggest that when solely considering ESG performance, RIFs tend to exhibit better ESG performance when managed by a team containing all members with conventional fund management work experience. When considering joint ESG and financial performance, the proportion of managers with exclusive RIF work experience positively impacts funds’ joint efficiency. Additionally, I also find insignificant differences in financial performance between funds with pure RIF managers and those where all the managers have conventional experience.

This thesis aims to bring greater transparency to an important and rapidly developing segment of the finance industry, which currently requires investors to simply trust that managers are fulfilling their statements on responsible investment. By providing additional insight into fund ESG performance, my findings may benefit “true believer” responsible investors when making asset allocation decisions. It may also be helpful for regulators (e.g., the SEC) in their efforts to monitor and promote transparency within capital markets.