Institutional background

Fund managers increasingly incorporate Environmental, Social, and Governance (ESG) factors into their public communications. However, the economic meaning behind these disclosures remains ambiguous. The Securities and Exchange Commission (SEC) highlighted in 2022 that inconsistent disclosures hinder the ability of investors to interpret investment strategies. This ambiguity has raised concerns regarding greenwashing, defined as a gap between a firm’s ESG claims and its actual actions. Recent regulatory enforcement underscores these issues; for instance, the SEC fined BNY Mellon $1.5 million in May 2022 and Goldman Sachs $4.0 million in November 2022 for misleading ESG-related statements.

Data and sample construction

The study utilises a dataset of 43,523 shareholder letters issued by 2,455 actively managed U.S. domestic equity mutual funds between 2006 and 2024. Shareholder letters offer a more direct and frequent communication channel compared to fund prospectuses. Researchers applied a fine-tuned BERT model (FINBERT-ESG) to process each sentence and identify ESG-related content. Out of the sample, 8,182 letters (approximately 19%) were found to include ESG disclosures. These disclosures were manually classified into four distinct categories: opportunistic, exclusionary, impact, and mention only.

ESG disclosures in shareholder letters and fund flows

At an aggregate level, ESG disclosure is associated with significantly higher subsequent investor flows. Funds with ESG-related content in their letters experience 0.4 percentage points higher cumulative flows over the next three months and 0.6 percentage points over the next six months. Despite this increase in capital, there is no evidence at the aggregate level that portfolios become “greener” following these disclosures. This pattern, where claims do not lead to improved ESG scores or emission controls, initially appears consistent with broad concerns about greenwashing.

ESG disclosure content: a closer look

Granular analysis reveals sharp heterogeneity based on the stated objectives of the disclosure. Opportunistic disclosures (22% of ESG-related letters) emphasise using ESG factors to enhance risk-adjusted returns. These disclosures attract the bulk of capital, resulting in 0.8% higher flows over three months and 1.1% over six months. This effect intensified following the Paris Agreement (December 2015), with opportunistic disclosures attracting 1.3% higher flows in the post-Paris period. In contrast, exclusionary disclosures (1.5%) and mention only disclosures (approximately 68%) do not trigger significant investor flow responses. Impact disclosures (8.5%), which reflect a dual motivation of financial goals and positive ESG outcomes, also do not significantly increase flows.

Revisit greenwashing and fund incentives

The study challenges the simple “greenwashing” narrative by linking disclosure types to realised outcomes. Funds making impact disclosures exhibit genuine improvements in portfolio ESG scores, effectively “walking their talk”. Conversely, funds making opportunistic disclosures see their portfolio ESG scores decline. However, since opportunistic letters frame ESG solely as a tool for financial performance rather than a commitment to “greening”, the lack of ESG improvement is not necessarily misleading.

There is a significant economic trade-off for managers. While opportunistic disclosures boost short-term flows, they expose funds to state-contingent downside risk. If a fund makes such claims and subsequently underperforms financially, it suffers significantly larger outflows compared to its peers. Specifically, the interaction between opportunistic disclosure and poor performance results in a negative and statistically significant impact on flows, suggesting that investors punish managers when “value-driven” ESG promises fail to deliver superior returns.

Conclusion

The research highlights that the substance of ESG communication is a decisive factor in driving investor capital and fund behaviour. Concerns about greenwashing may be overstated when disclosure intent is taken into account. Only financially motivated discussions result in significant inflows, while truly impact-focused claims tend to be backed by action. Regulatory and investor scrutiny should therefore look beyond generic ESG labels to consider the underlying credibility and specific objectives of ESG claims.