Incentives of Socially Responsible Fund Managers : Remuneration Incentives or Job Loss Concerns?

Mutual funds marketed as socially responsible funds (SRFs) face greater apparent burdens due to further non-financial filters applied to investments than conventional funds, that also restrict their investible universe. There is well reported evidence of unnecessary risk shifting and window dressing in mutual funds. We investigate if fund pursuing ethically focussed, socially responsible investments place expectations on SRI fund managers, that manifest in different risk management and agency behaviour to conventional funds (CFs). SRFs are usually self-identified or tagged by publicised SRI mandates but may not necessarily be adhering to such mandates. We use a uniquely constructed dataset based on actual fund equity holdings to verify this claimed focus, and scrutinise the degree to which a declared or undeclared focus on ESG investments manifest in different risk management approaches to that of CFs. We find SRFs perform better and exhibit significantly less agency behaviour, indicated by unnecessary risk shifting and window dressing, than CFs. Notably, funds that focus on ESG investments like SRFs, but do not market themselves as SRFs exhibit similar risk-shifting behaviour to conventional funds