Spotting portfolio greenwashing in sustainable funds

This paper examines greenwashing practices in sustainable funds portfolios. We use an event study to examine whether sustainable funds' announcements about their commitment to decarbonization lead to abnormal flows from investors. We utilize a unique data set of US equity mutual funds and their holdings, over the period 2011-2021, to calculate the sustainable fund portfolios' carbon footprint. We find that sustainable fund flows respond positively to announcements from sustainable funds. Surprisingly, this result shows significantly positive cumulative abnormal flows in the event window, while there are significant and negative incremental abnormal flows before and after the event window. To overcome selection bias and endogeneity, we use Difference in Differences analysis to measure how much the carbon footprint of sustainable funds changes following the announcement date. These results confirm that sustainable funds fail to reduce their carbon footprint relative to conventional funds over the period that follows the announcement date. Moreover, This is consistent with the signaling theory argument. By rushing to announce the integration of sustainability criteria in the fund's prospectus, asset managers give misleading signals to investors about their commitments toward decarbonization which is considered a sign of greenwashing