Unpackaging ESG: Evidence from 401(k) Investment (Job Market Paper), with Jiahong Shi

[Slides] [Draft]

Abstract: We study how investors respond to scandals related to three distinct aspects of ESG--E(nvironmental), S(ocial) and G(overnance)--in their retirement savings. Using data on 401(k) investments, we show that nearby ESG scandals correlate with increased ESG fund additions and flows, possibly through "evoking'' their existing sustainable preferences. Investors with different characteristics respond heterogeneously to E, S and G scandals. In magnitude, old investors are twice as likely as young investors to add ESG funds to their portfolios after the shock of social scandals. In specific scandals, low-income investors care about human rights, while only young and rich investors care about environmental issues. Investors also have clear leanings on ESG funds, resulting in an overweighting of funds with higher environmental and social scores and a lack of attention to governance elements. Overall, our results suggest the need to incorporate distinct E, S, and G concerns into heterogeneous preference models.

Presentation: LSE seminar, Renmin University of China, NEOMA, PBCSF Tsinghua University, Peking University HSBC Business School, CUHK-Shenzhen

Why Mutual Funds Decline in 401(k)s, with Jiahong Shi 

(draft available upon request)

Abstract: The market share of mutual funds in 401(k) plan delegated investments has diminished from 71.5% to 49.6% over the last decade. We show that mutual funds are being supplanted by collective investment trusts (CITs), an emerging investment vehicle characterized by minimal public information and regulatory oversight. Combining two novel datasets of 401(k) plans and institutional assets, we present the first thorough documentation of CIT returns and expenses at the plan-trust-year level. Although mutual funds are noted for their transparency, as opposed to the more opaque CITs, our findings indicate a marked preference for CITs among 401(k) investors, attributed to their significantly lower expenses—almost 50% less than those of mutual funds—while still providing similar gross returns. CITs that exhibit a higher level of transparency are more likely to be adopted by 401(k) plans. Similarly, 401(k) plans that are better governed tend to transition to CITs. Despite their lower transparency, we observe that CIT flows are markedly less sensitive to performance than mutual fund flows, which further contributes to the more pronounced decline of mutual funds within 401(k) portfolios.

Presentation: LSE seminar