Mutual Fund Trading, Greenwashing, and ESG Clientele

This paper studies trading by equity mutual funds comparing Environmental, Social and Governance (ESG) funds with conventional funds, using the COVID-19 market crash as a quasi-natural experiment to test funds’ commitment to ESG strategies. Funds that disclosed their ESG orientation in their prospectuses increased their portfolioweight of non-ES stocks. In contrast, funds with High Globe ratings or Low Carbon designation from Morningstar maintained a stable portfolio weight in ES stocks in response to fund flows during the crash. Results are consistent with ESG prospectus funds engaging in greenwashing. There is no evidence of widespread greenwashing by the other ESG funds.