Abstract
This paper examines if equity funds’ investment in environment, social, and governance (ESG) affects their performance and flows. Utilising a novel fund-level ESG metric, we find that stocks with high ESG scores tend to underperform, while funds with more ESG investment do not generate inferior performance. It suggests that fund managers process active skills to cover the cost and find the optimal level of ESG investment. Also, fund-level ESG attracts money inflows, and investors do value ESG in their fund selections (Hartzmark and Sussman, 2019). Further tests show that the skills of fund managers with more ESG investment may attribute to their low-beta strategies and information in stock pickings. Our results also shed new light on explaining the mechanism of investing in socially responsible funds.