In this article, Professor Aaron Yoon shares with us the key implications from his latest research paper – “Analyzing Active Managers’ Commitment to ESG: Evidence from United Nations Principles for Responsible Investment” 

ESG has been a very fast-growing phenomenon and heavily debated issue in the recent decade by both academics and practitioners. One of the most notable and commonly cited phenomena for ESG is the United Nations Principles for Responsible Investment (PRI) that was launched in 2006. An asset manager signing this initiative would commit to incorporating ESG into their portfolio decision making process and become active owners. By 2019, the total AUM of signatories have grown from just a few hundred billion to more than $80 trillion. This number is more than double the United States market cap.

The PRI’s goal is to encourage adoption of the following 6 principles:

  • incorporate ESG issues into investment analysis and decision-making processes,
  • be active owners and incorporate ESG issues into ownership policies and practices,
  • seek appropriate disclosure on ESG issues by the entities in which they invest,
  • promote acceptance and implementation of the Principles within the investment industry,
  • work together to enhance the effectiveness in implementing the Principles, and
  • report on activities and progress towards implementing the Principles.

The signing of the actual commitment is made by a senior executive of the investment management firm and the firm would commit to voluntarily adhering to PRI by signing the declaration form, paying a nominal annual membership fee, and publicly reporting on their responsible investment activity through a UN-guided reporting framework. According to the UN PRI website in 2019, the only mandatory requirement was to publicly report their responsible investment activity.

Signatories are also asked to have an investment policy for more than 50% of their AUM that covers the firm’s responsible investment approach, internal/external staffs responsible for implementing responsible investing policy, and senior-level commitment and accountability mechanisms for implementation. Failure to meet these guidelines over a short grace period, following extensive engagement with the PRI, would result in delisting (though we do not find any funds that are delisted from UN PRI during our sample period).

In our paper, we analyze active US asset managers’ commitment to ESG using UN PRI as a setting, because we know very little about whether PRI is indeed monitoring the asset managers and whether asset managers are indeed investing and engaging companies according to their commitments. We focus on active managers (i.e., not ETFs or index funds), because we want to focus on the asset managers’ actual adoption of ESG factors without being constrained to track a specific index.

We find that there is a very significant increase (4.3% increase per quarter for the six quarters after signing PRI) in the capital allocated to signatories that committed to incorporate ESG. We find that this increase in fund flows happens regardless of prior fund-level ESG performance. However, we find that signatories do not make improvements in fund-level ESG performance while exhibiting a notable decrease in return.

Our finding is robust to using a battery of different ESG dimensions from various data vendors. Further, we find that signatory funds vote less on environmental issues and that stocks in their portfolio experience increased environmental controversies post signing. We also look at cross-sectional characteristics and find that institution-only funds and quant-driven funds are more likely to improve fund-level ESG performance. However, other fund characteristics do not drive meaningful changes in ESG.

Overall, we conclude that only select funds improve ESG while many others use the PRI status to attract capital without notable changes to ESG. We view that our findings have very important implications.

  • First, our paper suggests a need for a systematic way to measure and assess how asset managers execute ESG. We view this as important in light of the increasing amount of capital being committed into ESG and relevant for policy makers and the UN PRI itself to protect the welfare or investors.
  • Second, our paper calls for the asset owners to be more aware and effectively monitor investment managers when they allocate capital to funds that are claiming ESG.
  • Last, our paper suggests that asset managers may need to provide transparent communications about how they are actively incorporating ESG.


Bio: Professor Aaron Seokhyun Yoon is an assistant professor at the Kellogg School of Management and he currently teaches Financial Accounting Core (ACCT 430) to MBA students. One area of Professor Yoon’s focus is on how to better quantify a firm’s Environment Social Governance (ESG) efforts and integrate the information into equity portfolios. According to the Financial Times, one of his research on ESG was a turning point on how investors viewed and integrated ESG information. The methodology suggested in his research has been widely implemented by asset owners and investment managers.

Professor Yoon earned his Doctor of Business Administration from Harvard University; he also earned his masters in Economics and bachelors in Economics and Mathematical Methods in the Social Sciences (MMSS) from Northwestern University in four years. Prior to academia, he previously worked as an equities salestrader and research analyst at Credit Suisse, and also controlled air traffic in the 8th US Army as a Korean augmentee. (View Full Bio)