Title: Does Regulatory Oversight Discipline ESG Funds to Walk the Talk?

Authors: Dichu Bao (Lingnan University), Lixin (Nancy) Su (The Hong Kong Polytechnic University), Chengzhu (Lisa) Sun (The Hong Kong Polytechnic University), Huai Zhang (Nanyang Technological University)

Abstract: The possibility that investment funds use the ESG-investing label to attract investment flows without making real ESG-oriented investments is a widespread concern. Exploiting the launch of the SEC’s Climate and ESG Task Force (the Task Force hereafter), we investigate whether securities regulators’ oversight disciplines the funds to “walk the talk.” Using actual ESG incidents as an objective ESG performance measure, we show that relative to non-ESG funds, ESG-labeled funds tilt their investment more toward firms with better ESG performance after the launch of the Task Force. Such changes are more pronounced among ESG-labeled funds with poorer pre-launch fund-level ESG performance and those located closer to the SEC. We further analyze the effect of the Task Force’s enforcement actions and uncover weak evidence that the enforcement action is effective in forcing ESG funds to better align their investments with their stated objectives. Collectively, our results suggest the effectiveness of regulatory oversight in disciplining ESG-labeled funds’ investment decisions.