Catering through transparency: Voluntary ESG disclosure by asset managers and fund flows

Voluntary ESG disclosure by institutional investors improves capital allocation efficiency by enabling clients to allocate responsible capital to institutions with better ESG incorporation. Institutional investors disclose on their ESG practices as part of their voluntary commitment to the Principles for Responsible Investing (PRI), the world’s largest responsible investment network. After joining the PRI, investors annually file a detailed ESG report, which is assessed and scored by the PRI. Clients allocate more assets toward institutions that receive higher scores on their disclosure. The disclosure becomes more effective when it is corroborated by third-party ESG fund ratings. Importantly, investors that disclose better ESG practices exhibit more sustainable equity holdings, suggesting that the disclosure is not cheap talk.