Active fund management when ESG matters

Doron Avramov; Si Cheng; Andrea Tarelli

doi:10.1016/j.jbankfin.2025.107597

Active fund management when ESG matters

Doron Avramov
, Si Cheng^*
, Andrea Tarelli

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

This paper develops and tests an equilibrium model of active fund management with ESG considerations. Heterogeneous sustainability preferences lead fund managers to intensify information acquisition on assets across the ESG spectrum, broadening the scope of active management. This information channel enhances price informativeness, lowers discount rates, and increases portfolio deviation from benchmarks. The model predicts a negative and concave ESG-expected return relation, stronger for green assets and weaker for brown assets. Using data on U.S. mutual funds and stocks from 2007–2021, we find supporting evidence based on price informativeness and the implied cost of equity capital.

Original language	English
Article number	107597
Journal	Journal of Banking and Finance
Volume	182
DOIs	https://doi.org/10.1016/j.jbankfin.2025.107597
State	Published - Jan 2026
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2025 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license. http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

Asset pricing
Information acquisition
Mutual funds

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10.1016/j.jbankfin.2025.107597

Cite this

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title = "Active fund management when ESG matters",

abstract = "This paper develops and tests an equilibrium model of active fund management with ESG considerations. Heterogeneous sustainability preferences lead fund managers to intensify information acquisition on assets across the ESG spectrum, broadening the scope of active management. This information channel enhances price informativeness, lowers discount rates, and increases portfolio deviation from benchmarks. The model predicts a negative and concave ESG-expected return relation, stronger for green assets and weaker for brown assets. Using data on U.S. mutual funds and stocks from 2007–2021, we find supporting evidence based on price informativeness and the implied cost of equity capital.",

keywords = "Asset pricing, Information acquisition, Mutual funds",

author = "Doron Avramov and Si Cheng and Andrea Tarelli",

note = "Publisher Copyright: {\textcopyright} 2025 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license. http://creativecommons.org/licenses/by-nc-nd/4.0/",

year = "2026",

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doi = "10.1016/j.jbankfin.2025.107597",

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AU - Avramov, Doron

AU - Cheng, Si

AU - Tarelli, Andrea

PY - 2026/1

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AB - This paper develops and tests an equilibrium model of active fund management with ESG considerations. Heterogeneous sustainability preferences lead fund managers to intensify information acquisition on assets across the ESG spectrum, broadening the scope of active management. This information channel enhances price informativeness, lowers discount rates, and increases portfolio deviation from benchmarks. The model predicts a negative and concave ESG-expected return relation, stronger for green assets and weaker for brown assets. Using data on U.S. mutual funds and stocks from 2007–2021, we find supporting evidence based on price informativeness and the implied cost of equity capital.

KW - Asset pricing

KW - Information acquisition

KW - Mutual funds

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VL - 182

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

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ER -

Active fund management when ESG matters

Abstract

Bibliographical note

Keywords

Access to Document

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