Environmental Disclosures and ESG Fund Ownership

We examine whether ESG funds’ investment decisions are sensitive to firms’ environmental disclosures, beyond summary ESG ratings. We create our measures of environmental disclosure using bigrams extracted from the Global Reporting Initiative (GRI) standards trained against authoritative financial reporting texts. Using two salient disclosure channels, (1) the risk factor portion of firms’ 10-K filings and (2) earnings conference calls, we find robust evidence that the supply of environmental disclosure is associated with greater ESG fund ownership in the subsequent period, incremental to firms’ ESG ratings. Moreover, the ESG investing response to firm disclosures is increasing with firms’ exposure to climate-related shocks. We also provide evidence that fund managers’ reliance on environmental disclosures is concentrated in energy and emissions disclosures; as well as specific, forward-looking, negative, and uncertain disclosures. Overall, our evidence is consistent with ESG funds relying on firms’ disclosures when making investing decisions and inconsistent with recent criticisms that ESG fund managers are not following through on their stated investing strategies.