Decoding Sustainable Investment Strategies: Bridging Intentions and Actions

Our study employs a novel machine-learning approach to uncover the underlying intentions driving U.S. mutual funds' sustainable investment strategies. The identified intentions include financial value, categorical morality, and impact. While morality is about inherent goodness of actions, impact is conditional on outcomes, and they each satisfy distinct nonpecuniary references. We find that 1,500 mutual funds pursue sustainable investment goals and manage $1.4T or 6% of the total AUM as of 2023, compared to 269 funds managing $0.3T or 3% in 2014. Among the ML-identified sustainable funds, financial funds are the most common, and impact funds are the rarest. The ratio of (Financial | Moral | Impact) sustainable funds is about (70:20:10), or approximately ($1T | $300B | $140B), respectively, in 2023. Thus, capital allocated to generate positive impact on the environment and society (“impact capital”) is only 0.6% of total MF AUM ($25.5T). Stated sustainability goals of mutual funds are consistent with their portfolio decisions. Financial funds hold higher ESG-rated stocks to manage ESG-related risk. Moral funds underweight sin sectors. Among the Morningstar sustainable funds, financial-moral hybrid funds are popular. Impact funds, though the least common, exhibit distinctive management practices, actively engaging with portfolio companies and supporting social and environmental shareholder proposals. These findings illuminate the need for clear classification labels to differentiate between doing well and being good' versus 'doing good'. By clarifying fund sustainability objectives, our methodology enhances investor welfare by facilitating informed decision-making tailored to individual preferences. Understanding the heterogeneous underlying preferences of sustainable investors and the potential tension between them can in turn inform policy decisions, investment practices, and corporate behavior.