Spotting Portfolio Greenwashing in Environmental Funds

Abstract This paper examines greenwashing practices in environmental funds. We utilize a unique data set of US equity mutual fund holdings between 2012 and 2021 to calculate the funds’ carbon footprints. Using a difference-in-differences analysis, we find that, following their commitments to sustainability, environmental funds fail to reduce their carbon footprints relative to a matched group of conventional funds. We also find, using an event study, a significant increase in the flows of environmental funds in response to these commitments. The combination of the failure to reduce carbon footprints and the surge in inflows provides evidence of greenwashing by environmental funds, raising concerns about their fiduciary duty. Our findings also show that greenwashers tend to initially have low flows and high portfolio carbon emissions suggesting that they announce their commitments to sustainability just to attract investors.