In March 2021, the SEC created a new Climate and ESG Task Force to proactively identify misconduct related to ESG investing. This taskforce was created out of the SEC’s concern that asset managers may be misleading investors by marketing certain funds as ESG-friendly but not making investment decisions consistent with such marketing. This concern is shared by many members of the asset management industry. For example, in a recent op-ed, BlackRock’s former Chief Investment Officer for Sustainable Investing, Tariq Fancy, states:

“…our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”

Given these concerns, in this paper we attempt to verify whether ESG-oriented funds’ claims, of picking portfolio firms that exhibit superior treatment of all stakeholders—consumers, employees, the environment, taxpayers, and shareholders—are borne out by the evidence. Our empirical approach focuses on whether self-labeled ESG-oriented mutual funds invest in firms with better track records with respect to these groups of stakeholders based on fundamental measures of behavior—or misbehavior—toward each group. Our primary measure of stakeholder-centric behavior is portfolio firms’ compliance with social (e.g., labor or consumer protection) and environmental laws. We also consider a host of other measures of stakeholder-centric behavior related to each of “E”, “S”, and “G”: carbon emissions, reliance on taxpayer-funded corporate subsidies, CEO compensation, board composition, and the balance of power between management and the shareholder.

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