ESG Sentiment and Active Mutual Fund Management
Using ESG sentiment data from TruValue Labs to capture firm-level sentiment shifts, we find that quarterly portfolio holdings of U.S. equity mutual funds are positively associated with the ESG sentiment of the firms they hold. Specifically, fund managers increase holdings of positive ESG sentiment firms when these firms have positive ESG sentiment change. However, fund managers do not decrease holdings of firms with negative ESG sentiment change. To establish a performance benchmark for such active fund management, we follow Serafeim (2019) and find that firms with good ESG performance and negative ESG sentiment are underpriced whereas those with poor ESG performance and positive ESG sentiment are overpriced. Motivated by this insight, we perform further tests conditional on firm-level ESG performance. We find that managers increase holdings due to increases in positive ESG sentiment only when the firm has good ESG performance. Likewise, they decrease holdings amidst decreases in ESG sentiment when ESG performance is poor. This evidence suggests that ESG sentiment induced active management is unlikely to reflect skills.