Essays on Sustainable Mutual Funds

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School of Business | Doctoral thesis (article-based)
Degree programme
20 + app. 156
Aalto University publication series DOCTORAL THESES, 69/2022
This dissertation consists of an introduction and three original essays. The first essay (joint with Markku Kaustia) investigates mutual funds' potential "greenwashing" behavior. We find that ESG-profiled funds receive higher inflows compared to otherwise similar funds. 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. Analyzing funds repurposing into ESG shows that fund families especially tend to convert funds that had somewhat lackluster flows. Detecting and understanding greenwashing is key to curbing it, and thus promoting public trust in this proliferating market, with high hopes for its role in the green shift. The second essay investigates whether investors can digest raw ESG information directly. Using a quasi-exogenous shock of Morningstar's criteria change for the sustainable fund list, an event without any fundamental news, I show that ESG investors blindly follow this signal and respond, implying a lack of information digestion ability and a heavy reliance on ESG information providers. Funds that are excluded from the list suffer a substantial decrease in net flows, both in the short term and long term. Studying investors' digestion channels and the role of ESG information intermediaries is crucial in helping regulators promote better practices in the booming world of ESG investment. The third essay investigates how mutual funds behave under the EU Sustainable Finance Disclosure Regulation (SFDR). It provides the first glimpse of how funds' characteristics are correlated with their SFDR category choice ("dark green," "light green," or "others") and how investors react to the initial stage of the SFDR. I find that greener mutual funds are more likely to be in the greener profiles under the SFDR classification, consistent with the purpose of the regulation. Interestingly, funds with better past performances in terms of returns and flows are slightly more likely to be in the not-green-stated group than the light green group. In the post-SFDR period, I find no evidence of these new green profiles bringing additional flows given the existing sustainability-related labels.
Supervising professor
Kaustia, Markku, Prof., Aalto University, Department of Finance, Finland
sustainble finance, ESG investment, investor behavior, greenwashing
  • [Publication 1]: Markku Kaustia, Wenjia Yu: Greenwashing in mutual funds. Unpublished Manuscript
  • [Publication 2]: Wenjia Yu: Do fund flows react to non-fundamental ESG information? Evidence from Morningstar’s sustainability criteria change. Unpublished Manuscript
  • [Publication 3]: Wenjia Yu: SFDR and mutual funds. Unpublished Manuscript