Do ESG funds actually have much impact?
- Robin Powell
- Jun 23
- 7 min read
Most people who buy an ESG fund assume it does some good: that their money helps nudge companies towards better behaviour. New research into ESG fund impact finds that, for the majority of funds, it does not. A committed minority genuinely changes how companies act. The rest, whatever their labels say, behave much like any other fund.
Sustainable investing has drawn in enormous sums over the past decade, and its appeal is easy to understand. Directing money towards responsible companies, and using the influence that ownership brings to keep them honest, feels like a way to make savings count for something beyond their return. Whether it works in practice has, until recently, been surprisingly hard to establish.
There are reasons for doubt. One is that the asset-management industry appears to be using its ownership power less, not more. ShareAction's Voting Matters 2024 report, published in February 2025, found that average support for environmental and social shareholder resolutions among the 70 largest asset managers fell to 20.6 per cent in 2024, down from 40 per cent in 2021. Of the 279 resolutions assessed, four won majority backing. Vanguard supported none of them.
So if the largest managers are barely using the votes that ESG investing relies on, does any of it make a difference? A study published in the Review of Financial Studies in 2026 suggests it does, but only for a particular kind of fund, and not the kind most investors could pick out.
What separates a committed ESG fund from the rest
Michelle Lowry, of Drexel University, with Pingle Wang and Kelsey Wei, of the University of Texas at Dallas, start from an awkward fact: two ESG funds can hold almost identical portfolios and still behave entirely differently as owners. What divides them is not what they hold but what they stand to gain from improving it.
The researchers studied actively managed US domestic equity mutual funds from January 2013 to December 2020. They identified ESG funds using MSCI ESG ratings, then split them using a measure developed by Jonathan and Katharina Lewellen in 2022 that captures a fund's financial incentive to engage. The idea is straightforward. If a fund owns a large, concentrated stake in a company, a rise in that company's value flows through to the fund's assets and, in turn, to the manager's fees. A fund with a small, widely spread holding has far less to gain from the effort of pushing for change.
By this measure the two groups are not close. The average incentive-to-engage score is 8.7 per cent for committed funds and 3.5 per cent for the rest. Yet on the surface they look identical: both hold 39 per cent of their assets in high-ESG stocks. The label tells you nothing about which is which.
The classification is also stable. A fund classified as committed has a 94 per cent chance of still being in the same group a year later. And it lines up with independent assessment: the only two US asset managers that Morningstar rates as leaders or advanced on ESG commitment, Calvert and Parnassus, are both committed under the researchers' method.
How committed funds behave differently
What does that incentive translate into? More work, for one thing. When a company in their portfolio is exposed to a heightened ESG risk, committed fund families are significantly more likely to download its regulatory filings from the SEC's EDGAR database, a marker of genuine scrutiny. Among other ESG funds, no such pattern appears.
The difference shows up on company earnings calls too. Analysts from committed ESG fund families are 54 per cent more likely to ask an environmental or social question than their counterparts at other ESG families, a 3.5 percentage point increase on an unconditional rate of 6.5 per cent.
They also vote with more independence. Committed funds are about 20 per cent more likely than other ESG funds to vote against the recommendations of the proxy adviser ISS on environmental and social proposals, rather than following its guidance automatically. The unconditional rate of disagreement with ISS is 34.7 per cent.
The clearest difference is what committed funds do when something goes wrong. After a negative ESG event, they are significantly less likely to sell. They hold their position and press for change. Other ESG funds are more likely to divest, the negative screening that much retail ESG guidance has long encouraged. As the researchers put it, committed funds influence company behaviour 'without relying on negative screening', which suggests that divestment-oriented strategies 'may be misguided'.
Whether engagement changes anything in the real world
Behaving like an engaged owner is one thing; changing the company is another, and it is the real test of ESG fund impact. Here the paper makes its central claim. Firms that committed funds bought and actively engaged with after a severe ESG incident went on to reduce their ESG risk. Over the following three quarters, their score on the RepRisk Risk Index, a widely used measure of a company's exposure to environmental, social and governance controversies, fell by 33 per cent more than it otherwise would have.
The obvious objection is that committed funds might simply be better stock-pickers, buying firms that were going to improve anyway. The researchers address this with a natural experiment. In 2016 Morningstar introduced its Sustainability Ratings, which channelled fresh money towards funds holding sustainable stocks regardless of those funds' own choices, an external shock to fund flows rather than a decision by the manager. Firms that committed funds had overweighted before the shock saw their RepRisk score fall by 20.6 per cent afterwards. Firms overweighted by other ESG funds showed no significant change.
Divestment, in this data, did not discipline companies. Selling a stock transfers it to an owner who may care less, and the firm itself feels nothing. The finding echoes a wider body of work, including papers by Edmans, Levit and Schneemeier and by Berk and van Binsbergen, suggesting that exit is a weaker lever than voice.
Why engagement works when divestment mostly does not
Why should engagement work where divestment does not? Two theoretical papers help explain it.
The first, by Alvin Chen and Jan Starmans of the Stockholm School of Economics and Deeksha Gupta of Johns Hopkins University, was published in the Journal of Financial Economics in 2026. It is a formal model rather than an empirical study, and it identifies what the authors call a market-governance channel. When informed investors trade on environmental and social concerns rather than purely on financial information, they make share prices less informative about how well a company is being run, which makes it harder and more costly for shareholders to hold managers to account. The effect, the authors note, is driven by active investors; passive funds, which allocate on public signals, do not move prices in the same way.
The second, by Eleonora Broccardo, Oliver Hart and Luigi Zingales, published in the Journal of Political Economy in 2022, compares the two strategies directly. Their model finds that if most investors are even slightly socially minded, engagement, or voice, achieves the socially desirable outcome. Divestment, or exit, does not, unless almost every investor is strongly committed. Together the two papers give a theoretical reason for the empirical pattern: the funds that engage are the ones that move the needle.
The catch for investors
There is a reward for investors, but a narrow one. Committed funds outperform other ESG funds by about 1 per cent a year on the positions they hold for the long term, and by 1.5 to 1.7 per cent a year on holdings in companies that later cut their emissions. Across all their holdings, though, there is no outperformance. These figures are adjusted for the characteristics of the stocks held and measured before the costs that do so much to determine what investors keep.
The bigger problem is that investors cannot easily tell the committed funds apart. Nor are those funds rewarded with higher inflows for their greater impact: once performance is accounted for, they attract no more money than their less engaged peers. Average mutual fund investors, the authors conclude, 'cannot differentiate between sustainable investments that are positioned to have social impacts and opportunistic window dressing'.
Two caveats matter. The research covers US funds and runs to 2020, so the specific figures are US-derived even if the principle travels. And screening is not worthless, in that it carries some reputational weight, but its effect is far smaller than most ESG investors assume.
What this means for anyone choosing an ESG fund
The label on an ESG fund turns out to be the least informative thing about it. What separates a fund that changes companies from one that merely owns sustainable stocks is whether it engages, and engagement, unlike intent, leaves a trail.
That trail is public. How a fund actually votes shows whether it backs environmental and social resolutions or quietly sides with management. The contrast can be wide: ShareAction found that UK and European asset managers supported 81 per cent of environmental and social resolutions on average in 2024, against 7 per cent for the four largest US managers. For a UK investor, that is a signal worth reading.
None of this is an argument against sustainable investing. The concerns that bring people to ESG funds, from climate change to working conditions to the way companies are run, are serious ones, and the research does not suggest otherwise. What it questions is narrower: whether a particular fund does anything to address them. The point is not that investors should avoid ESG funds, but that the label on the front tells them little about what happens behind it.
So the evidence does not say which fund to buy. But it does say where to look. The difference between an ESG fund that makes a difference and one that does not lies not in the name or the marketing but in how the fund behaves as an owner, and that, at last, the evidence lets us see.
Resources
Broccardo, E., Hart, O. D., & Zingales, L. (2022). Exit versus voice. Journal of Political Economy, 130(12), 3101–3145.
Chen, A., Gupta, D., & Starmans, J. (2026). Sustainable investing and market governance. Journal of Financial Economics, 181, 104273.
Lowry, M., Wang, P., & Wei, K. D. (2026). Are all ESG funds created equal? Only some funds are committed. Review of Financial Studies, 39, 79–113.
Looking behind the ESG label
If this piece has left you wondering whether your own ESG funds are doing what their labels imply, the practical difficulty is the one the research identifies: the funds that genuinely engage are hard to tell apart from those that simply hold sustainable stocks. TEBI's Find an Adviser directory lists advisers who have publicly committed to evidence-based investing and can help you look behind the marketing at how a fund actually behaves as an owner.
For readers who want to ground their thinking in the wider evidence first, How to Fund the Life You Want by TEBI editor Robin Powell and Jonathan Hollow sets out the evidence-based approach at book length. Bloomsbury published the second edition; it is available on Amazon.