The sustainability trap: Active fund managers between ESG investing and fund overpricing

Abstract

This study examines the relation between a fund’s environmental, social and governance (ESG) rating and active fund investment skill. We find that higher ESG ratings are associated not only with higher overpricing in the fund. Rather, higher sustainability of the fund also leads to higher overpricing in the fund even relative to its benchmark. Pursuing higher fund sustainability hence leads to active fund overpricing which is typically interpreted as low investment skill.