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This article was originally posted on the Oxford Business Law Blog on 15 July 2021.

By Rajna Gibson, Simon Gloßner, Philipp Krüger, Pedro Matos, Tom Steffen

There is growing interest globally in ‘responsible investing,’ whereby institutional investors incorporate environmental, social and governance (ESG) issues into their investment processes. One of the leading investor initiatives, the UN-sponsored Principles for Responsible Investment (PRI), whose signatory members publicly commit to incorporating ESG principles, counted over 3,000 signatories representing collective assets under management (AUM) of close to US$ 100 trillion at the end of 2020. These PRI signatories are generally large institutions in terms of their assets under management and predominantly located outside of the US.

However, little is known about how these institutional investors commit to and implement responsible investment strategies and whether they ‘walk the ESG talk’ and actually translate their ‘words into actions.’

In our recent paper, we use novel survey data from the PRI reporting framework, ESG stock level ratings and institutional investors equity holdings in an attempt to shed light on these issues. For that purpose, we first compute ESG scores for each investor’s equity portfolio based on the Refinitiv, MSCI and Sustainalytics ESG ratings of its constituent stocks and call this the institutional investor’s portfolio-level ESG score. Second, we use the PRI Reporting Framework to compute the intensity of each PRI signatory’s commitment to ESG strategies, by sorting on whether they apply a dedicated ESG equity investment style to all (100%) or part (between 1% and 99%) or none (or don’t report) of their equities under management. We call these three categories respectively PRI signatories with full, partial and no ESG incorporation. Our main results can be summarized as follows:

  1. On average, across the world, PRI signatories seem to walk the ESG talk and have better portfolio-level ESG scores—significantly better ones, for their governance and social pillars—than their non-signing institutional investor peers. However, there are some important geographical differences: in particular US PRI signatories do not display better ESG portfolio scores than their non-signing peers.
  2. US PRI signatories that do not incorporate any equity-based responsible investment strategy display even ‘worse’ portfolio level ESG scores than their non-signing peers, whereas, in the rest of the world, a higher incorporation of responsible investment generally translates into a better portfolio-level ESG score.
  3. A stronger level of ESG investment incorporation is positively related to stronger environmental and social norms prevailing in the countries of the PRI signatory’s home location, to the institutional investor being domiciled outside of the US and a lower level of ESG investment style incorporation tends to be associated with having experienced a lower risk-adjusted portfolio performance in the past.
  4. So why do some US-domiciled institutional investors sign the PRI but do not implement responsible investment? Our results shed light on this question by showing that these investors are actually able to attract significantly higher flows and thus that their primary motive is commercially-driven, pointing to some form of ‘greenwashing’ in the US. In other words, some US PRI signatories pretend to be more responsible than they really are to profit from the increased market interest in ESG investing.
  5. So what are the main attributes of these US domiciled greenwashers? They are institutional investors who experienced poor risk-adjusted performance in the past, who cater primarily to retail clients (and are thus subject to less monitoring), who have experienced higher levels of ESG incidents in their own firms and who were late PRI joiners.

To summarize, our empirical results point to a disconnect between the commitment of some US domiciled PRI signatories and their effective ESG equity portfolio incorporation, whereas, in the rest of the world, PRI signatories actually seem to ‘walk the ESG talk.’ Our empirical findings thus raise some open questions. First, how important are the economic and social costs associated with greenwashing? Second, how can greenwashing and its externalities for stakeholders be mitigated? Is it through better sustainable finance literacy, through enhanced ESG reporting disclosure standards (such as the EU taxonomy for sustainable activities), through better ESG data quality and KPIs or a combination of all these measures? Finally, if such measures need to be enforced, is market self-discipline—and its related reputational costs—going to be sufficient to mitigate opportunism among institutional investors or do ESG regulatory frameworks need to be strengthened?

Rajna Gibson is a Professor at the University of Geneva and an ECGI research member.

Simon Gloßner is a Postdoctoral Research Associate at the University of Virginia.

Philipp Krüger is an Associate Professor at the University of Geneva and an ECGI research member.

Pedro Matos is a Professor at the University of Virginia and an ECGI research member.

Tom Steffen is a Quant Researcher at Osmosis IM.

This post is based on contributions to and the discussion at the 5th Annual Oxford Business Law Blog conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’ which took place online on 25 to 27 May 2021. This post is forthcoming in Andreas Engert, Luca Enriques, Georg Ringe, Umakanth Varottil and Thom Wetzer (eds), Business Law and the Transition to a Net Zero Carbon Economy (CH Beck - Hart Publishing 2021) (forthcoming).”.


Event: Business Law and the Transition to a Net Zero Carbon Economy (25 - 27 May 2021)

Videos of the presentations are available on the ECGI website and YouTube channel.

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