For once, this is not greenwashing

Fund companies have a knack for relabelling their funds to make them more attractive to investors. In the late 1990s, many funds changed their names to include the word “growth” or similar expressions to convey that investors would get significant exposure to the booming tech stocks.

Similarly, there is an increasing number of funds that add words like “green”, “sustainable” or “ESG” to their names to attract investments. Ever the cynic, I immediately assumed that this was another instance of greenwashing where funds get a nice new label and but change little. But it seems that in this case, my cynicism was misplaced. 

Two Canadian researchers looked at the 28 mutual funds in the United States that changed their names to sound greener between 2003 and 2018. As could be expected, the funds that changed their names were rewarded with increased inflows of investor money. In the year after the name change, fund flows increased by 1.18% per month (14.2% for the year) for the average fund. Excess flows above similar funds that did not change their names rose even more (1.83% per month or 22% for the year). 

Obviously, that is incentive enough for funds to engage in greenwashing, but investors do seem to see through this scheme. The funds that attracted the most inflows were funds that either had a high beta with ESG indices beforehand (i.e. they already had a relatively green portfolio) or funds that experienced a significant increase in portfolio turnover in the year after the name change. This increase in portfolio turnover was likely due to the fund managers changing their portfolios to make them greener. Funds with low beta to ESG indices and little increase in portfolio turnover saw very few if any additional inflows. The greenwashers simply missed out on the additional investor flows.

There is another piece of good news for investors. Even though some of the funds that changed their names saw their portfolio restructured their overall characteristics in terms of bias towards value or growth, small or large stocks remained pretty stable. Investors weren’t getting a totally new fund after the name change. They were getting a greener fund managed by the same experienced managers and with the same styles they were already used to.

Number of funds changing their names

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Source: El Ghoul and Karoui (2020)