The backfire of mutual funds balancing financial objectives in ESG investments: Evidence from China

In response to ESG (Environment, Social, and Governance) shock, mutual funds seem to be moving toward balancing the ESG objectives with traditional financial objectives. We observe such efforts in a sample of the Chinese active mutual funds from 2016 to 2022. These funds fulfill the Principles for Responsible Investment (PRI) requirements by investing in assets that combine superior ESG performance with excellent returns. However, the balance strategy falls short of its intended goals compared to normal ESG investments but rather leads to additional underperformance. Although our work reveals potential opportunities for balancing ESG and financial objectives, the lack of learning process and the limited attention make mutual funds miss such opportunities when they switch to balance strategy to speculatively cope with PRI constraints. This outcome suggests that in the face of the new investment trends driven by ESG shock, funds would pay a price for a superficial understanding of balance strategy and hasty actions.