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Truth or Dare? ESG Risk Disclosure of Mutual Funds

Wang, L. Truth or Dare? ESG Risk Disclosure of Mutual Funds. .

Abstract

This paper investigates ESG risk disclosures by mutual funds when investors learn from their disclosures in addition to past performance. Using a novel natural language processing method to identify ESG-risk disclosure in mutual fund prospectuses, I find that funds with higher ESG risk are more likely to disclose ESG risk than equivalent funds with lower ESG risk. To understand this, I develop a theoretical model which illustrates how ESG risk disclosure reduces investor reliance on past returns, thereby moderating flow performance sensitivity and smoothing fund fee income. I also show that the key predictions of the model hold in practice when I empirically test the model using U.S. mutual fund data. My results suggest that ESG risk disclosure can be used for risk management purposes to mitigate the adverse effects of high ESG risk exposure.

Publication Type: Monograph (Working Paper)
Publisher Keywords: ESG, Mutual Fund, Natural Language Processing, Risk Disclosure
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
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