Talk vs. Walk: Lessons from Silent Sustainable Investing of Mutual Funds 

By | January 12, 2024

In response to the escalating demand for sustainable investment options, the mutual fund industry is actively integrating sustainability into investment strategies and has introduced numerous financial products focused on sustainable investing. Consequently, mutual funds in capital markets can generally be categorized into two groups: self-identified ESG funds and non-ESG funds. Notably, over 70% of the top sustainability-rated funds do not carry an ESG label. As a result, investors interested in ESG investing face two primary choices: mutual funds explicitly labeled as ESG funds or those with excellent sustainability ratings but lacking the ESG designation.  

This situation raises several intriguing questions. First, do investors react differently to the ESG label (“talk”) and the high sustainability rating (“walk”)? Second, why are many highly sustainable-rated funds (“silent”) hesitant to identify themselves as ESG funds? Third, do investors benefit equally from top-rated sustainable funds with or without the ESG label?  

In our recent study, we find answers from 2,113 actively managed US equity funds between 2018 and 2023. We document that funds carrying the ESG label witness a noticeable increase in fund flows, while the sustainability rating’s impact is not evident. The economic impact of the ESG label corresponds to an average increase in flows of approximately 57 basis points each month through June 2023. Our findings are robust, even when distinguishing institutional and retail fund share classes. 

Despite this, we observe that funds already performing exceptionally well on sustainability ratings do not experience significant inflows after repurposing as ESG funds. In other words, emitting a new ESG label signal does not benefit funds with high-tier sustainability ratings. 

Furthermore, considering both the pecuniary and non-pecuniary motives of ESG investors, we investigate the return and risk characteristics of top-rated sustainable funds with or without the ESG label. Our results reveal that both raw and risk-adjusted returns of the fund portfolio consisting of high-sustainability-rating funds without the ESG label do not statistically differ from the counterpart containing self-labeled ESG funds. Moreover, we uncover an interesting variation in investment styles between non-ESG labeled high sustainability-rated funds and their labeled counterparts, with the former exhibiting a significantly higher exposure to the small-cap factor. This distinction potentially impacts the risk profile of these funds, prompting us to explore their risk features. 

Our findings reveal that sustainability ratings have a more pronounced influence in reducing various fund risk metrics compared to the mere presence of a self-proclaimed ESG label. We interpret this finding as the common practice among self-labeled ESG funds, which often employ investment selection via screening or best-in-class approaches, prioritizing firms with top-tier ESG scores. In contrast, high-sustainability funds that do not label themselves as ESG funds enjoy more flexibility in their investment strategies. 

Together, these findings point toward the conclusion that there is an overreaction by investors towards ESG labels, as silent yet highly sustainable mutual funds demonstrate performance that is either equal to, or superior, when compared with their labeled counterparts.  

Our study yields significant implications. It provides valuable insights that encourage asset management companies to think about their marketing strategies for “silent” funds, given these funds’ genuine sustainable investing practices and investor underreaction toward them. Furthermore, our study offers implications to regulators considering implementing ESG-related policies on funds, including assessing the effectiveness of the SEC’s newly unveiled ESG labeling rules for mutual funds. More importantly, we redirect investors’ focus from a particular term (the ESG label) to more essential sustainable investment products in a broader context. This contribution aims to expand the landscape of sustainable investing, fostering the growth of this vital investment sector.  


Dimitrios Gounopoulos is a Professor of Accounting and Finance at the School of Management, University of Bath.  

Haoran Wu is a Postgraduate Research Student at the School of Management, University of Bath. 

Binru Zhao is an Assistant Professor of Banking and Finance at the Bangor Business School.  

This post was adapted from their paper, “Talk vs. Walk: Lessons from Silent Sustainable Investing of Mutual Funds,” available on SSRN 

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