Greenwashing in Mutual Funds

Abstract

This paper investigates mutual funds’ potential “greenwashing” behavior. Funds profiled as ESG- based receive higher inflows compared to other similar funds. Importantly, we show this is true also for ESG labeled funds having inferior objective ESG profiles, as based on Morningstar sustainability ratings, applying to both retail and institutional funds. An analysis of mutual funds repurposing into ESG focus shows that fund families especially tend to convert such funds whose ability to attract in-flows has been lagging behind. Documenting and uncovering the motives for greenwashing is vital in terms of trust in the emerging and rapidly growing market of green financial products, with high hopes for its pivotal role in combating climate change.