KINGSVILLE (July 29, 2024) — Many investors want to know that the firm or mutual fund in which they invest are doing their utmost to be sustainable.
Dr. Tom Krueger, chair of the accounting and finance department and Professor of Innovation in Business Education in the College of Business Administration at Texas A&M University-Kingsville (TAMUK), and two of his colleagues, just had a paper published in the Journal of Investing that looks at just that issue.
Dr. C. Edward Chang, Professor Emeritus of finance, and Dr. H. Doug Witte, professor of finance, both from Missouri State University, joined Krueger in their paper, Comparison of ESG-Mandated and Non-Mandated Funds Using Morningstar Measures of Sustainability and Performance.
“Given the interest in Environment, Society and (corporate) Governance (ESG), an extensive amount of money has been spent by companies to demonstrate their compliance with these goals. They are producing 200-300-page sustainability reports that make it difficult for investors to wade through the noise,” Krueger said.
“Complicating the issue further, the correlation of rating agencies assessment of various ESG models is only .54. For a benchmark, the correlation of rating agencies assessment of companies stands at .92 (or almost perfect agreement). We needed a readily available source of information which we were able to get from Morningstar,” he said.
How can an investor find out if they are investing in a company that tells the truth about their sustainability? Krueger said the term being used is greenwashing where a firm or mutual fund overstates their adherence to ESG ideals.
“Morningstar uses two criteria to identify what they refer to as ‘mandated’ funds or those with an ESG focus. One is having ESG or similar term in their title and the other is having ESG as a prominent component of the mutual fund’s prospectus. It’s not perfect, but it gives you an idea of which mutual funds should be considered ‘sustainable’,” Krueger said.
If investors discover that a company they invested in is not sustainable as they claim to be, Krueger said there is no legal recourse. “What they can do is sell shares of these companies that are spending excessive amounts on ESG.
On the other hand, Krueger said, there are corporations that do more than they need to when it comes to sustainability. “A study of 4,500 U.S. and European companies found on average 62.5 percent of the ESG data reported was unnecessary to comply with regulations and satisfy guidelines of relevant investment funds.
“Making it worse, the average listed company spent $675,000 annually on ESG data and ratings. Although all the data is not in yet for 2023, the estimate is that 92 percent of the companies spent 10 percent or more than they did in 2022,” he said.
Key findings from the work of Krueger, Chang and Witte include
- “Motivated by investor and regulator skepticism regarding the increasing proliferation of firms and funds claiming allegiance to ESG ideals, we investigate the greenwashing issue by comparing mutual funds and exchange-traded funds (ETFs) with and without sustainability mandates. For funds with a sustainability mandate, Morningstar give a high sustainability rating to 85 percent of the funds while just 60 percent of the ETFs receive the same rating.”
- “Mandated mutual funds have higher Morningstar sustainability ratings than their non-mandated peers, but have similar past performances, expenses and anticipated performance ratings. Mandated ETFs also have higher sustainability ratings than their non-mandated peers, plus better prior risk-adjusted returns and forward-looking Quantitative ratings.
- “For funds with a sustainability mandate, EFTS are generally cheaper than their mutual fund counterparts. The mandated ETFs also have a better financial outlook than mandated mutual funds, as suggested by higher Morningstar Analyst ratings and Qualitative ratings.”
-TAMUK-
