Elsevier

Finance Research Letters

Volume 36, October 2020, 101313
Finance Research Letters

ESG fund scores in UK SRI and conventional pension funds: Are the ESG concerns of the SRI niche affecting the conventional mainstream?

https://doi.org/10.1016/j.frl.2019.101313Get rights and content

Highlights

  • Increasingly conventional pension funds are considering ESG factors.

  • ESG scores of conventional and SRI funds are influenced by common characteristics.

  • The SRI-fund nature positively influences ESG scores.

  • SRI funds outperform.

  • A higher ESG screening intensity provides greater return and larger flows.

Abstract

This paper analyses the increasing practice of considering environmental, social, and governance (ESG) factors by conventional pension funds. We study whether the SRI (Social Responsible Investing) concerns are affecting traditional management. In an initial sample of 22 SRI and 221 conventional UK domestic equity pension funds from 2016 to 2018, we apply the nearest-neighbour matching to account for fund-characteristic differences, selecting 20 matched conventional funds. We then analyse the influence of fund characteristics on ESG fund scores, and the ESG-score impact on performance and flows with linear models. Our results show that the ESG scores of conventional and SRI funds are influenced by some common characteristics (age/turnover and expenses negatively/positively influence ESG scores), which are consistent with SRI features. Additionally, a higher ESG screening intensity provides greater return and larger flows. Nonetheless, SRI funds do not lose their identity, positively influencing into ESG scores to a greater extent and outperforming.

Introduction

The evolution of the Social Responsible Investing (SRI) has generated diverse ESG criteria, producing SRI funds with dissimilar ESG scores (Joliet and Titova, 2018). Barnett and Salomon (2006) and Gangi and Varrrone (2018) indicate that SRI funds have diminishes the ESG standards to provide similar performance to conventional funds. Becchetti and Ciciretti (2009) argue that not too restrictive ESG criteria reduce SRI information costs and increase the limited ESG stock universe. Some studies notice SRI funds with low ESG scores because some funds include the SRI denomination to attract inflows (Cooper et al., 2005; Gangi and Varrrone, 2018; Kempf and Osthoff, 2008). These conducts are understood by several authors as a convergence of SRI and traditional management, moving from a SRI niche to a mainstream SRI (Dunfee, 2003; Hellsten and Mallin, 2006; Revelli 2017). This raises the concern about the real ethics of SRI funds (Hellsten and Mallin, 2006). While the SRI niche selects ESG assets causing management constraint, the mainstream SRI pursues to integrate the ESG dimension into conventional management (Azoulay and Zeller, 2006; Revelli, 2017).

Additionally, recent studies find that conventional funds are increasingly considering ESG criteria due to several reasons. First, the integration of ESG principles as part of the fiduciary duty has been internationally accepted (UNEP FI, 2009). Second, the increasing demand of stakeholders regarding their impact on the environment and society (Goy and Schwarzer, 2013). Third, conventional funds seek to restore the trust in their damaged legitimacy and contain the effects of crises (Gangi and Trotta, 2015; Joliet and Titova, 2018). Furthermore, the ESG integration is an opportunity to generate profits (Revelli, 2017). Consequently, the SRI niche may be crossing the border of conventional funds, expanding to the conventional-management mainstream.

The latter behaviour may be noteworthy in pension funds, given their pro-social behaviour, long-term investment horizon, management of large retirement savings, high political profile, and common association with labour movements (Arnold and Hammond, 1994; Himick and Audousset-Coulier, 2016; Neu and Taylor, 1996; Sandberg, 2013; Sievänen et al., 2017). Sparkes and Cowton (2004) find that the adoption of SRI policies by pension funds has largely increased in countries such as the UK, one of the pioneers on regulating the ESG disclosure to enhance the importance of non-financial risks (Eurosif, 2017; UKSIF, 2018). Nevertheless, the SRI pension-fund literature is negligible (Ferruz et al., 2010; Siëvannen et al., 2017), despite the fact that the motivation, objectives, time horizon, and clientele may differ with regard to other institutional investors (Hoskisson et al., 2002).

This scenario raises the need to analyse the implications of including ESG concerns by conventional funds. Hence, this paper contributes on the emerging debate about the expansion of the SRI niche into the mainstream. In a sample of UK pension funds, we examine whether similar managerial characteristics determine the ESG scores of SRI and conventional funds, the importance of the SRI label, and the influence of ESG scores on fund results.

Section snippets

Literature review

The growing concern of investors about the ESG impact of their investments has increased the accountability of conventional funds regarding their ESG investment practices (Armstrong and Green, 2013; Arjaliès, 2010; Crifo and Mottis, 2013; Hasford and Farmer, 2016). This trend raises whether conventional funds follow similar managerial and fund structures to SRI funds to integrate ESG criteria. Whether this conduct materializes, we expect similar fund and managerial characteristics influencing

Data

The data of UK domestic equity pension funds are obtained from Morningstar Direct and include the daily return, monthly return, monthly Total Net Assets (TNA), inception date, manager history, annual turnover ratios, annual expense ratios, a SRI dummy (which equals one/zero if a fund is a SRI/conventional fund), and four annual ESG fund scores: total ESG, Environmental, Social, and Governance, ranging from 0 (lowest) to 1 (highest). Our sample period is from January 2016 to December 2018

Results

Table 2 shows the results of model (1). Panel A shows that SRI funds present higher scores than conventional funds. This evidence is consistent with our premise that SRI funds preserving their ethical objective present significantly higher ESG scores. However, SRI funds focus on/disregard the environmental/social dimension; that is, SRI funds present greater concern about environmental issues, and conventional funds concentrate on the classic pro-social purpose of pension funds (

Conclusions

The increasing practice of considering ESG factors by conventional pension funds raises the need to analyse whether conventional and SRI funds share some features in the ESG criteria applied, which lead to reach certain ESG level. Additionally, we study the effect of ESG scores on fund results. In a sample of UK SRI and matched conventional domestic equity pension funds, our results show that implementing more demanding ESG strategies (i.e. higher ESG fund scores) requires more resources and

Funding

This work was supported by Gobierno de Aragón Grant S38_17R.

Declaration of Competing Interest

None.

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