This paper investigates the role of active management in the sustainability performance of U.S. equity mutual funds. Despite the rise of passive investment strategies, actively managed funds continue to account for the majority of assets in the mutual fund industry. Using a sample of 2,860 mutual funds and a comprehensive set of sustainability measures, including compliance violations, CO2 emissions and emissions intensity, ESG scores, and reputational risk, we document that greater active management, measured as deviation from market indexes, is associated with improved portfolio-level sustainability. A one-standard-deviation increase in active management corresponds to a 6% reduction in overall and environmental violations as well as a 13% decrease in labor and consumer violations. Actively managed funds also show 3.6% lower Scope 1 CO2 emissions and a 12% lower Scope 1 emissions intensity. In addition, these funds tend to hold firms with higher environmental scores and lower reputational risk. Our results are robust to a range of alternative specifications, including categorical definition of active management, incorporation of ESG-screened market indexes, and sensitivity tests that account for missing data and disclosure bias. Furthermore, although we find no evidence that actively managed funds are able to align ESG performance with financial returns, or that more sustainable portfolios attract greater investor flows. We find a positive association between stronger sustainability outcomes and higher management fees, indicating that managers may use portfolio sustainability outcomes to signal their active stock-selection skill. Overall, our findings suggest that the value of active management may lie in its ability to identify and invest in firms with superior sustainability performance, compared to passive strategies that replicate the market portfolio.
