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HomePaperDecoding Sustainable Investment Strategies: Bridging Intentions and Actions

Decoding Sustainable Investment Strategies: Bridging Intentions and Actions

30 March 2024
Authors: Ayako Yasuda (University of California, Davis) and Keer Yang (University of California, Davis)
Presenter: Ayako Yasuda (University of California, Davis)
Abstract:

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 categorical morality is implemented via exclusion, impact is generated via active investment and engagement, and they each satisfy distinct nonpecuniary preferences. We find that the majority of funds labeled as “sustainable” prioritize enhancing financial value or adhering to categorical morality over generating impact. Notably, our method reveals the prevalence of hybrid funds, blending financial and moral objectives. This blended strategy amounts to rebalancing portfolios with high ESG-rated stocks to mitigate risk, while underweighting sin industries. Impact-driven funds, though less prevalent, exhibit distinctive management practices, actively engaging with portfolio companies and supporting social and environmental shareholder proposals. Our results underscore the negative correlation between financial and impact goals. These findings illuminate the need for clear classification labels to differentiate between ‘doing well and being good’ versus ‘doing good’. By clarifying fund 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.

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